Hybrid Mortgages Making a Comeback

Once again the hybrid mortgages are gaining favor with consumers. For the past 5 years, fixed-rate home loans ruled the scene, but now their hybrid counterparts are on the brink of taking their previous place. The big question is whether this could pose a major risk to borrowers and to the housing market as a whole.

Hybrid mortgages are adjustable-rate mortgages with an initially fixed rate. The rate is typically fixed for a period of 5 years. That is why they are called 5/1 adjustable rate mortgage (ARM) loans. In December 2013, they formed 3.4% of all home loans. In March 2014, their share was 9.9%. This e increase of 6.5% in just 4 months is more than impressive. The concerns about another housing market crisis are growing.

The increase in demand for hybrid mortgages is a direct result of the climbing interest rates. They are still at a historic low, but the 1% increase on an annual basis has made housing a lot less affordable for many people. In the beginning of April 2014, the average interest rate on a 30-year fixed-rate mortgage is 4.46%. For comparison, the average interest rate on a 5/1 ARM home loan is 3.25%. Even though the ARM rate experienced greater percentage increase during March 2014, it is still nearly 1.2 percentage points lower.

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The lower interest rate is a major reason why home buyers prefer hybrid mortgages, but the potential risk of default when the rate becomes adjustable is still present. Experts hurry to explain that the current hybrid loans actually hold much lower risk compared to their counterparts which were widely available before the housing market crisis. They typically come with lower adjustment caps with the 2/2/5 structure replacing the common 5/2/5 structure. Currently, most 5/1 ARM loans have an initial adjustment cap of 2% instead of 5%.

The stricter mortgage requirements introduced in January 2014 are another guarantee that the hybrid mortgages will be used only by borrowers who can afford them.



Christian Calvin mortgage Christian is a contributing writer for Mortgage.info. He is a graduate from the University of Tennessee with a degree in Communications and a concentration in Broadcasting. Christian has served as vice-president for a privately-held company for more than 20 years. Additionally, he has also applied his writing and business knowledge to various websites with a focus on business and sports news . . . both of which are passions. Christian enjoys playing golf and spending time with his family and friends.

Contact: christian@mortgage.info

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