Hybrid Adjustable Rate Mortgage (ARM) Explained

Hybrid Adjustable Rate Mortgage (ARM)

Sometimes called an intermediate ARM, a fixed-period ARM, or a multiyear mortgage, a hybrid mortgage combines aspects of fixed-rate and adjustable-rate mortgages.

The initial rate is fixed for a specific period -- usually three, five, seven, or ten years -- and then is adjusted to market rates. The adjustment may be a one-time change, or more typically, a change that occurs regularly over the balance of the loan term, usually once a year.

In many cases, the interest rate changes on a hybrid mortgage are capped, which can help protect you if market rates rise sharply.

One advantage of the hybrid mortgage is that the interest rate for the fixed-rate portion is usually lower than with a 30-year fixed-rate mortgage. The lower rate also means it's easier to qualify for a mortgage, since the monthly payment will be lower. And if you move or refinance before the interest rate is adjusted -- the typical mortgage lasts only seven years -- you don't have to worry about rates going up. However, some hybrid mortgages carry prepayment penalties if you refinance or pay off the loan early. While prepayment penalties are illegal in many states, they are legal in others.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.