Hybrid ARM mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7, or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable-rate for 23 years.

The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that’s fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while having a period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is taken out. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes.

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Hybrid ARMS

One of the key benefits of hybrid ARMs is that they offer the stability of a fixed-rate mortgage during the initial fixed-rate period, which can be especially helpful for borrowers who are planning to stay in their home for a relatively short period of time. After the initial fixed-rate period, the interest rate on a hybrid ARM will typically adjust based on changes in a specified index, such as the 1-year Treasury or the London Interbank Offered Rate (LIBOR), plus a margin set by the lender.

Another key benefit of hybrid ARMs is that they may offer lower initial interest rates than fixed-rate mortgages. This can be especially helpful for borrowers who are looking to lower their monthly mortgage payment or qualify for a larger loan. However, it is important to note that the interest rate on a hybrid ARM will typically adjust after the initial fixed-rate period, which may result in higher monthly mortgage payments in the future.

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