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Hybrid ARMs
Hybrid ARM mortgages (3/1, 5/1, 7/1, 10/1), also called fixed-period ARMs, combine features from both fixed-rate and adjustable-rate mortgages. A hybrid loan initially has an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10). Then, the loan converts to an ARM for a set number of years. Example: A 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.

The fixed-period of the loan is lower than the rate would be on a mortgage that's fixed for 30 years. A typical one-year ARM on the other hand, changes to a new rate every year, after the first year. The starting rate on an ARM loan is considerably lower than on a standard mortgage, but they carry the risk of future hikes.

Many borrowers get a hybrid and with the intention of refinancing before the initial term expires. Hybrid ARMs are best for people who do not intend to live long in their homes. With a lower rate and a lower monthly payment than with a 30- or 15-year loan, they can break even sooner on refinancing costs such as title insurance and the appraisal fee. With a lower monthly payment, borrowers can make extra payments and pay off the loan early, saving thousands during the years they have the loan.

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