How a Hybrid Loan Works

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A hybrid loan refers to a specific type of mortgage. With a hybrid loan, buyers have a fixed low rate on the loan for the first five to seven years of the mortgage term, which allows them to save money on their payments. After the first five to seven years of the mortgage has been paid off, the loan then moves to an adjustable rate.

This may cause some trouble for the buyers in the sense that the payment will change from month to month depending on the interest rate. An option for those who want to stay in the home without worrying about how high the interest rate will jump is to get a hybrid loan with an interest rate cap. This will set a maximum interest rate that can be charged in a monthly payment, therefore allowing buyers to budget the maximum amount their mortgage payment could be.

People choose these loans because the low fixed interest rate in the beginning is cheaper than many other mortgage options, and these days, not too many people stay in a home longer than five to seven years before they sell or refinance. For those who only plan to stay in the home a short period of time before moving to another, this is an excellent chance to save money.