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A relatively new mortgage option, the hybrid option ARM is an adjustable-rate mortgage. It is a hybrid option ARM because it has a certain number of years as a fixed-rate mortgage before it becomes an adjustable-rate mortgage. This combination gives a borrower time to pay down the principal balance of the loan before the interest rate starts to adjust.
Option ARMs are available from many of the well-known lenders. They are available in several different configurations, with common options such as 3/1, 5/1 and 7/1. The first number refers to how many years of the loan term remain at the fixed rate, while the second number of the term refers to the length of time the interest rate will remain the same. For instance, a 3/1 option ARM will have a fixed rate for three years, and after this period is over, the interest rate will be adjusted every year.
After the first initial fixed interest rate period is over, the traditional option ARM takes over and allows for four payment options: a minimum payment, an interest-only payment, a 15-year amortizing loan payment or a 30-year amortizing loan payment.
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