What is a hybrid ARM?

The most common ARM products we originate are hybrid ARMs. With a hybrid ARM the interest rate is fixed for an initial period of time before it reaches an adjustable rate period.

3/1, 5/1, 7/1, & 10/1 ARM’s– The most common hybrid ARM’s are the 3/1, 5/1, 7/1, and 10/1 ARM’s. With these loan products a borrower is able to lock in an initial interest rate for 3,5,7, & 10 years respectively. In most interest rate environments the borrower is able to lock in a lower rate for these initial periods than if they were locking into a 30-year fixed rate. Since most homebuyers do not stay in the same home or keep the same mortgage for more than 5 years these loans can provide the same level of interest-rate security as a fixed rate mortgage with a lower interest expense. After the initial fixed interest rate period is up these loans then go into an adjustable rate period where the interest rate will adjust either annually or every six months.

How do 7/1 Interest-only ARM’s work?

With a 7/1 interest-only ARM the loan will carry a fixed rate for the initial 7 years of the loan. After that, the interest rate will adjust on an annual basis. For the first 7 years of the loan the borrower may make interest-only payment on the outstanding balance. At the end of 7 years the payments will amortize annually based on the remaining term of the loan.

For example, let’s say we could lock a loan today @ 6.00% on this program for a $300,000 loan. For the first 7 years the borrower would make an interest-only payment of $1,500 per month. At any time the borrower could make a payment above and beyond the interest-only payment which would be applied to principal. Because the loan carries an interest-only payment they could expect their payments to decrease upon paying down a portion of the principal.

After 7 years let’s assume the rate adjusts to 8.00% and the balance was still $300,000 (because the borrower elected not to pay any principal over the first 7 years). At that time the monthly payments would increase to $2,380 which reflects a 23 year amortization at 8.00%.

This loan can be a great program because for most home-buyers the 7 year fixed period offers plenty of interest-rate security while the interest-only payment provides plenty of cash-flow flexibility.

What is a Home Equity Line of Credit (HELOC)?

A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.

HELOCʼs have extremely flexible terms and is an excellent financial tool for homeownerʼs with a large equity position in their home. HELOCʼs typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish.

Due to the flexible nature of the draws HELOCʼs have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOCʼs can vary from -.50%-3.00%.

The margin is determined by the borrowerʼs credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOCʼs do have an annual service fee charged for the maintenance of the account.