What do I need to consider before getting a hybrid mortgage


As with most mortgage loans, with hybrid mortages there are several factors to consider.

  1. First is the lifetime cap. A 5% loan with a 5% lifetime cap means that you will never pay more than 10% interest.
  2. Second is the interest rate adjustment cap. How much can the rate adjust during any one adjustment period? This is extremely important. It is your security that you can count on a maximum that the rate can adjust and plan for this increase in a rising interest rate market.
  3. The third cap is the payment cap. Will any interest rate adjustment be fully reflected in your monthly payment? If the answer is yes, you should figure out what your monthly payment will be if the interest rate adjusts to the highest rate allowed. If the answer is no, will you be able to extend the term of your loan or will you have a balloon payment?

Finally, you must look at the worst possible adjustment. For example, your fixed rate is 5% for three years. There is a 5% cap. The worst that could happen is that three years from now, your interest rate will be 10%. If you owe US Dollars 240,000 when the loan becomes adjustable, that is a US Dollars 12,000 per year increase in interest. Will your payment increase by US Dollars 1,000 per month? Refinancing will not be a good option, since prevailing rates for a new loan will be in the same 10% range. Since fast-rising interest rates usually drive down property values, you may not be able to get out from under your mortgage by selling your home.

If you feel that you are being overcharged, do not hesitate to tell your lender or mortgage broker that you believe you should get a better margin rate. Ask for an explanation as to why the rate is so high.

Of course, you can what if yourself out of buying a home. If the only way you can qualify for any home is through a hybrid, the gamble is probably worth it. If the hybrid is the only way to buy your dream home, maybe you should look again at the lowerpriced adequate home that you could keep if the worst happens to interest rates. You can plan to minimize a larger increase in interest rates, but the problem is it requires discipline that most people do not have.

If you can take the amount of money you save every month with your lower-interest hybrid loan and put it into some sort of interestbearing account, you can create a cushion for yourself for when the loan switches from fixed to adjustable.

Example: By getting the hybrid at a lower interest rate, you save US Dollars 100 per month over a fixed rate mortgage. Your loan will begin to adjust after five years. Each month, you put this US Dollars 100 savings into an interest-bearing account. At the end of five years, you will have US Dollars 6,000, plus the amount of interest you have accumulated. This can be used to pay the monthly increase in your payment or give you some time to find a buyer if you cannot afford the higher payment.

The higher your loan, the greater the savings. On a US Dollars 200,000 loan, a 1% difference in interest would save you US Dollars 2,000 per year. You would have US Dollars 10,000 at the end of five years, plus the interest you made on the savings. It may put a strain on your budget, but it might also avoid disaster if the worst happens. Of course, if interest rates do not increase, having an extra US Dollars 10,000 in the bank cannot hurt.

Legal Disclaimer

Our website is not responsible for the information contained by this article. Articleinput.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.

Note: This article was sent to us by: Michael Stawten at 04302010

Related Articles

1. Life values and how we spend our money
Market research and advertising firms know we make spending decisions based on what we value. Insurance sales pitches focus on how much we value our families and are co...

2. What are competing values and how to become financially fit
Competing Values The same value tradeoff is at work when we decide where to spend our limited time. For most of us, when we have finished work, we want to kic...

3. Learn financial management and make the right decisions
Learning Financial Management Can Be Fun Financial management starts with education - whether through taking a formal class, reading a book, or talking to a fin...

4. Buy today pay tomorrow is not doing any good to your finances
Who takes care of your fnancial well-being? Do you pursue happiness through the "things" and "services" you buy? The answer is most likely "yes" for most of us ...

5. Buy only what you need and become financially competent
Searching for What You Really Value You either decided to keep your promise to yourself or to buy the prized item, according to your inner priorities. Did you...

6. Be a savvy consumer and make the right financial choices
Becoming a savvy consumer This is not our parents' (or grandparents') financial marketplace. Only a few decades ago, we were faced with far fewer financial de...

7. Health insurance you can afford if you choose your provider carefully
Health Insurance and Health Care The health insurance industry and our nation's employers are setting themselves up squarely in opposition to the vast fast fo...

8. How to get and keep good credit to balance your financial situation
Getting and keeping good credit Mastering the marketplace includes questions about if, what, and when to buy. Having good credit reflects how we choose to pay...

9. Cash money disappears in the USA while credit grows
Credit Society - Our Way of Life Cash and the use of cash money is slowly disappearing in the USA. It is predicted that before long, our nation will be a "cashles...

10. Scams and frauds you can avoid by staying informed
Staying ahead of scammers and thieves ew scams surface more frequently these days, but attempts to defraud unsuspecting consumers are nothing new. Our greatgran...