FHA Hybrid ARMs:
FHA loans come in a variety of loan terms depending on the outlook and financial position of the borrower. Most often borrowers choose a 30 year amortized fixed interest rate. This loan requires the same mortgage payment over a 30 year period. At the end of the 30 year period the loan is paid off. The Hybrid ARM is a good alternative to the 30 year fixed rate but operates a little differently.
The Hybrid ARM usually comes with a lower interest rate that is fixed for the first 3 (3/1) or 5 (5/1) years. At the end of the initial fixed period the interest rate can adjust within certain limits. The adjustments are limited to one adjustment annually and the rate cannot increase by more than 1%. Additionally, the rate can never be more than 5% greater than where it started. 5/1/5 means the initial rate is fixed for 5 years, the rate can adjust up or down by no more than 1% annually, & the rate cannot be 5% greater than where it started.
Why would someone choose an FHA Hybrid ARM?
Most borrowers have only heard negatives about the Hybrid ARM. Truly this program is not suitable for everyone but for some borrowers there is a great opportunity. The Hybrid ARM rate is significantly less than the fixed rate. There is interest saved as a result. Disciplined borrowers can apply the interest savings to the loan balance. At the time the rate adjusts, the interest calculated is based on the balance at the time of adjustment. Although the interest rate can go up, because the balance on the loan is less at adjustment (especially if you apply interest saved), the payment does not increase in a significant way.
Other borrowers know they will no have their mortgage for more than 7 years making the Hybrid a perfect opportunity to save on interest costs.
When the Monthly Mortgage Insurance Goes Away:
Once you pay the mortgage down to 78% of the original balance the mortgage insurance drops off. At that time, more money can be allocated to reduce the mortgage balance further reducing the payments at adjustment periods. Therefore, additional funds will be available that can be applied to reduce mortgage balances and deal with an increased interest rate.
Conclusion: Consider your options
Many ARM prorgams are unregulated & uncontrolled offering a high degree of risk. We don’t want to see anyone get into an uncomfortable situation. That said, the Hybrid ARM program offers opportunity to certain borrowers. In some situations, there is significant savings.
See how much you can save using our FHA Calculators.
See what current FHA Rates are: