Comparing Fixed Rate Hybrid Arm Pay Option Arm And Hybrid Option Arm Mortgages
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Comparing Fixed Rate, Hybrid ARM, Pay Option ARM, and Hybrid Option ARM Mortgages
Overview
With the myriad of mortgage options available today, it's essential to understand the differences between adjustable-rate mortgages (ARMs) to make informed decisions. The three popular types are Hybrid ARMs, Option ARMs, and Hybrid Option ARMs. Despite their similar names, each has distinct features.
Hybrid ARMs
Hybrid ARMs blend a fixed-rate mortgage with a traditional ARM. They have a fixed rate for a set period, followed by periodic adjustments. For instance, a 3/1 ARM is fixed for three years, adjusting annually thereafter. Common offerings include 2/1, 5/1, 7/1, and 10/1 terms.
These mortgages use indexes like MTA or LIBOR to determine rates, which include a margin (risk premium). Key features of Hybrid ARMs include:
1. Start Rate: Fixed for a specific duration (e.g., three years for a 3/1 ARM) before adjustments.
2. Adjustment Cap Structure: Limits on rate changes, such as a 5/1/5 structure where the rate can change by five points at first adjustment but only by one point thereafter.
3. Floor Rate: Minimum rate limit (often the initial fully indexed rate).
4. Ceiling Rate: Maximum rate limit, typically ranging from 9.95% to 11.95%.
A $100,000 Hybrid ARM at a 7% rate has a minimum payment of about $665, making it accessible for various credit levels.
One-Month Option ARM
Option ARMs offer flexibility with four payment options, including a minimal payment, popular for homeowners with fluctuating finances. The initial minimum payment on a $100,000 loan might be $322 compared to $665 for a traditional mortgage. This is attractive for self-employed individuals or small business owners.
Features include:
- Minimum Payment: Allows keeping current on the mortgage while deferring interest.
- Minimum Payment Adjustment Cap: Typically 7.5%, so a $1,000 payment won’t exceed $1,075 in the following period.
- Negative Amortization Cap: Limits loan balance growth due to deferred interest, prompting a recast if it hits 110%-120% of the loan amount.
For instance, a $100,000 Option ARM at a 1% start rate might result in:
- Minimum Payment: $322
- Interest Only: $667
- Deferred Interest: $345
- 1-Year Negative Amortization: $4,140
- Recast Balance: $115,000 (115% cap)
- Months to Recast: 43 (minimum payments only)
Once the negative amortization cap is reached, the option for minimum payments ends. Some products now extend the interest-only option beyond the typical three to four years. Generally, borrowers need a 660 FICO score or higher.
Hybrid Option ARMs
Hybrid Option ARMs merge the stability of fixed rates with the flexibility of ARMs. They appeal to those who desire fixed-rate security but need low payment options.
Typically beginning as 3/1, 5/1, 7/1, or 10/1 ARMs, they offer fixed rates for the initial period with similar features to Option ARMs, like minimum payments and caps.
Example: On a comparable hybrid option ARM package:
- Minimum Payment: $449 (at 3.5%)
- Interest Only: $583
- Deferred Interest: $134
- 1-Year Negative Amortization: $1,608
- Recast Balance: $115,000 (115% cap)
- Months to Recast: 112 (minimum payments only)
Many hybrid option ARMs allow an interest-only option at recast, reducing potential financial strain.
Conclusion
We've explored the nuances of Hybrid ARMs, Option ARMs, and Hybrid Option ARMs. These options offer varied benefits and risks, allowing borrowers to choose based on their financial situation and goals. For further information and advice, feel free to reach out with questions.
You can find the original non-AI version of this article here: Comparing Fixed Rate Hybrid Arm Pay Option Arm And Hybrid Option Arm Mortgages.
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