Q: Also called a fixed-period ARM, these crossbreed loans combine features of fixed-rate and adjustable-rate mortgages.
They start out with a fixed interest rate for a number of years – usually 3, 5, 7 or 10 years – and then convert to an ARM.
Initially, the interest rate for the fixed period of the loan is much lower than the rate on a fixed-rate, 30-year mortgage by about 1.5 percentage points. As a result, the hybrid allows borrowers to buy a lot more home than they can afford – but at greater risk.
The terms and fees for these loans vary widely and when the fixed-rate period expires, homeowners could end up paying considerably more than the current rate of interest.
Before considering a hybrid, pay close attention to the terms, fees, and prepayment penalties.
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