HYBRID can mean several different things when it comes to loans.
- Hybrid fixed/adjustable. When adjustable rate mortgages (ARMS) started to become more popular, some mortgage lenders referred to them as hybrid because they had a period where they were fixed and a period where they were adjustable. The term “Hybrid” was used to soften the blow of discussing an adjustable loan and draw attention to the short fixed period at the beginning of the loan.
- Hybrid Option Arms. Option ARMS offer 4 payment options each month: 15 year amortization, 30 year amortization, interest only (no amortization), and less than interest only (negative amortization). When they were first emerging, they were adjustable in the first 1-3 months, even though they had a guaranteed minimum payment.
People liked the concept of increasing their cash flow by being able to pay less than the interest only payment. And they were comfortable that their home value was going to increase, so they didn’t mind the fact that negative amortization increased their PRINCIPAL balance. The major objection most people had to Option ARMS was that they were adjustable from day one and if the rates went up sharply, then their amount of negative amortization would also rise.
The response was the “ hybrid option arm” which offered a fixed interest rate for 5 or even 30 years. This is basically a 5 year fixed or 30 year fixed loan that allows for a less-than-interest-only payment for a certain period of time (of course the lenders will eventually collect all the money they are owed). Thus, it is a hybrid of a fixed loan and an option ARM.
Option ARMS are one of the most confusing products ever created in the mortgage arena. Though they can be beneficial in the right circumstances, they have also had detrimental impact if used irresponsibly.