Is a Hybrid Mortgage Right for You?

by Center for Personal Finance editors

In recent years, many home buyers have combated rising interest rates by switching from fixed-rate financing to an adjustable-rate mortgage (ARM). But because payments and interest rates can rise, many home buyers feel uncomfortable about signing up for an ARM. An attractive alternative that provides the features of both a fixed-rate and adjustable-rate mortgage is the hybrid mortgage.

A hybrid mortgage--sometimes called a fixed-period ARM--combines the features of both a fixed-rate and adjustable-rate mortgage by starting off with a fixed interest rate for up to 10 years and then adjusting every year for the remaining life of the loan. The beauty of the hybrid mortgage is that the initial interest rate for the fixed period of the mortgage is considerably lower than the rate on a 30-year fixed mortgage.

Of course, these lower monthly payments don't come for free. After the fixed term is up, the interest rate is adjusted and it could increase dramatically. And some hybrids have prepayment penalties.

So who should consider a hybrid mortgage? Most experts agree that hybrid mortgages are not a good choice for those who plan to be in their home for more than 10 years. However, most people sell or refinance their homes after five to seven years, and it's these homeowners who should consider a hybrid mortgage. If you expect to be in a house three years or less, your best choice may be an ARM.

Use this calculator to help decide which mortgage may be better for you.

For all of your home mortgage needs visit the housing section in the Home & Family Finance Resource Center and talk to a loan officer at your credit union.

August 29, 2005