A hybrid loan is a mixture of two types of loans—specifically a fixed-rate loan and an adjustable-rate mortgage. The term hybrid in hybrid-loan refers to the fixed period of the loan, usually between two and five years.
A hybrid is different than an interest-only loan because it applies more money toward the principal of the loan. This results in more cash flow and a higher level of equity.
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Hybrid loans begin at a lower rate than the standard 30-year fixed-rate mortgage. This offers some protection if the interest rates rise dramatically.
These hybrid loans utilize a fixed rate for a period of three, five, seven, or ten years. During that time, payments and rates will stay the same. When the loans are listed, the first number tells you how many years the rate is fixed. For example, a 3/1 hybrid mortgage holds the same rate for the first three years.
Once the fixed period of the loan ends, the interest rate can change. The second number in the loan terms tells you how often the rate can adjust thereafter. For example, in a 3/1 loan, the rate can adjust annually after the initial three years.
Your monthly payment will change as interest rates change. These payments are calculated to help you pay off your debt and any extra interest that accrues over time. Higher rates result in higher payments—while lower rates can reduce your payment amount.
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Lower starting rates are enticing, but they do come with risk. Hybrid loans make the most sense under the right circumstances.
Mares Mortgage utilizes a web-based solution that enables you to search rates from over 175 banks.
If you plan to refinance or move within a short period, a hybrid loan can be a great fit. It allows you to benefit from the lower rate and potentially pay off the loan before adjustments begin. However, if your plans change, you may end up paying more in the long run.
One way to reduce the risk of future rate hikes is to make additional payments toward your principal. This helps pay off the loan faster—before rate changes occur.
While interest rates can rise, they can also fall. If rates drop, it may benefit you with lower payments. However, interest caps may limit how low your rate can go—protecting you from spikes, but also from fully benefiting from decreases. Learn more about interest rates.
Lower early rates can help improve your credit score with consistent, on-time payments. But once rates adjust, your ability to requalify for new loans at favorable terms may be limited if your credit hasn't improved enough.
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Two main factors influence your rate: the lender’s index rate and the spread they add. These are affected by rate caps:
As with any loan, hybrid loans have both pros and cons. They combine fixed and variable rate structures, offering both flexibility and uncertainty.
Many financial experts appreciate the balance of combining fixed and variable rates. Lenders often market hybrid loans as a balanced approach, offering two types of stability within a single loan structure.
While the concept seems simple, hybrid loans can be confusing in practice. If you prefer a straightforward, predictable loan structure, hybrid loans might feel overwhelming or too volatile.
Unlike variable rates, a fixed-rate portion won’t adjust downward if the market improves. That means if rates fall, you’re locked into the higher rate, which is the “gamble” with hybrid loans.
Getting the best deal on a hybrid loan is all about timing—but it’s possible. These loans can offer a secure option during times of changing interest rates. Understanding your options before committing can set you up for long-term success.
Want to work with a Certified Mortgage Planning Specialist? Mares Mortgage is a proud member of the National Association of Mortgage Professionals and can help you find the perfect loan for your needs.
