Are Hybrid Mortgages right for you?2-17-2011 Hybrid mortgages are a popular response to the spike in mortgage interest rates. For the borrower who wants to buy a home or refinance an existing loan but does not want the higher payment, the hybrid can be attractive. It offersa lower fixed rate for three, five, seven or 10 years. The rate then expires and the loan adjusts to a potentially much higher rate. With a hybrid mortgage, it is assumed that the borrower will sell the house, refinance the loan or receive a substantial jump in income before the rate increases. The hybrid allows borrowers to take advantage of a lower fixed rate during the early life of a loan which makes this type of loan alluring when compared to the higher rate offered by the traditional 30-year fixed-rate loan. But what if the house doesn’t sell in time? Or the borrower is unable to refinance? Or that big pay raise doesn’t come through? The borrower could be faced with an unaffordable payment. This is the risk that the borrower takes in trade for the lower interest rate in the beginning of the loan. Hybrid mortgages shift much of the risk from lenders to borrowers. The lender spreads the risk over thousands of mortgages with varying interest rates and time frames. The individual borrower is forced to assume the risk of his own mortgage and a possibly unmanageable payment in the future. The promise of an initial lower rate and payment with the hybrid mortgage lures borrowers into assuming such a risk. This could prove catastrophic for the borrower. Any number of unforeseeable factors – falling house prices, unemployment, disability or death – could put the home in foreclosure. Even without such calamities, the associated risk may prove to more than the borrower can handle. A slight increase of three percent – half the typical adjustment cap – could make the loan exorbitant for the home owner three, five or seven years in the future. The dull, 30-year fixed loan may pale in comparison to the initial hype of the hybrid mortgage. However, there is safety in the mundane. This safer loan need never be refinanced and protects the borrower from an astronomical interest rate and payment down the road. You tell me – are the new hip hybrid mortgages worth the risk? |
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