A New Hybrid Loan Program Program Can Save You Money?
what is a Hybrid Arm Loan?
First of all many people confuse this new hybrid loan as one of those "bad" loans that the media has been talking about over the past year, you know those loans with interest-only loans, pay-option "Pick-A-Pay" with negative amortization. However, the new Hybrid ARM is more of a conventional product. It carries a fixed rate for the first 5 or 7 years, then it can adjust up or down annually based on the market at that time.
Hybrid loans can offer you a great starting rate currently, under 4% fixed for the first 5 or 7 year period.
What is the difference between the Hybrid ARM and the "bad,toxic" Adjustable Rate Mortgages the media has been talking about?
Interest-Only mortgage loan where you pay the interest only payments during the initial term then your payments increase drastically which can put you in a situation where you can no longer afford your payments.
Pay-Option ARMs, as the name applies you pick a payment that suits you, interest only, principal and interest, most consumers pick the interest only option. the problem is that when the option period expires the loan increases significantly because the loan principal is amortized over the remaining term. If you had a 5 year Pay-Option at the end of 5 years your remaining balance is amortized over 25 years which will increase your payments on top of any interest rate increases. Another thing to be aware of if these loan come with a negative amortization provision you could be digging a whole to deep to get yourself out of.
Why choose a Hybrid Arm Loan? - First of all these loans are not for everyone. However, if you are not planning on staying in your home for the next 30 years this may provide an excellent option for you. Hybrid loans come with longer period of fixed rates and protect the borrower with annual rate caps and life of loan rate caps so you will not get hit with a large payment increase.
How does the annual rate caps work? - Typically these loans have a 2% annual cap and a lifetime cap rate of 6% maximum.
An example of this is if you have a loan in the amount of $250,000 and you choose a 7/1 Hybrid ARM loan. Fist, you will receive a 1% savings off a 30 year fixed rate loan program that would equal a $148.00 monthly savings on your loan payments versus a 30 year fixed loan at 5%. The savings on this loan would be around $12,432 over the entire 7 year period. Think about you would use extra money you could be each month, maybe you could use the extra money to pay down your current principal balance which would allow you to pay off your mortgage faster.
The downside to the ARM program is that the loan rate could go up or even go down in the eighth year. If, it did go up and you had a 2% annual cap the worst case scenario would be that your loan amount could increase by $305 a month which means you still have saved $8,772 over the past eight years, not bad! Another thing to consider at the eighth year you could always refinance and get new Hybrid low starting rate and repeat the process.
If you are not planning on staying in your home for the next 30 years the Hybrid ARM could be the best choice for you.
Michael Kench, specializes in Home Finance & Purchase Loans. He shows clients how to reduce their payments, obtain the best finance rates and pay off their existing mortgage in record time. Contact him at Home Loan Refinance Online
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