New Home Loan Options: The Hybrid Loan

by Gabriel Traverso
CMR Columnist

How do you know which home loan is right for you? Could a hybrid loan be the answer?

Traditional Fixed-Rate Mortgages

The traditional fixed-rate mortgage offers homeowners very little flexibility in a new home loan, though they do have their own advantages. The fixed-rate mortgage offers one rate that doesn't change for the lifetime of a loan, which is usually ten, 15, or 30 years. This makes the traditional mortgage an easy home loan to budget for. What if you need something different? Do you foresee financial changes down the road that would allow you to buy a more expensive home later on?

The Hybrid Home Loan

For most homeowners, the traditional fixed-rate mortgage is usually the best solution. For you it may be, or a hybrid loan could be the best option. The hybrid loan starts out with a fixed introductory rate that is usually lower than a standard fixed-rate loan. After a specified time, your loan can then fluctuate up or down based on an index (usually the Treasury Rate index or Cost of Funds index). Hybrid loans are usually listed with a number, such as 30/5/1 or 30/3/1. The first number indicates the number of years for which the rate is fixed, and the second indicates how many times a year the rate can adjust after the initial period. A 30/5/1 home loan is a 30 year loan with an introductory fixed rate that last for five years, after which the rate can adjust once, annually.

Mortgage Homework

It's rarely a good idea to step blindly into a home loan. Make sure you understand how your mortgage works and ask questions, such as whether or not there is prepayment penalty if you refinance. Use a mortgage calculator to see if you can afford the payments. Mortgage calculators are particularly useful tools when you're considering a hybrid loan. You can use it to check whether you will be able to afford those future payments, should they go up.

About the Author
Gabriel Traverso is a freelance writer, professional musician, and artist. He resides with his family in Reno, Nevada.

© 2008 CMR. All rights reserved.