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gin model. For example, a 3/1 hybrid has a 3-year fixed period and subsequent 1-year rate adjustment periods. Hybrids have gained in popularity in recent years. In 1998, the percentage of hybrids relative to 30-year fixed rate mortgages was less than 2%; by the beginning of 2006, some lenders were reporting as many as 90% of their mortgage loans to be hybrids.
Option ARMs
The borrower has the choice of making a specified minimum payment, an interest-only payment, or a 15-year or 30-year fixed rate payment in a given month. These are popular loans because they are usually offered with a very low initial interest rate and a low minimum payment, which allows borrowers to qualify for a much larger loan than they would otherwise. This type of loan was created to suit people in fields with sporadic income, some self-employed people or those in seasonal businesses. For example, someone who makes the majority of his or her income during the winter holiday season may wish to pay the full payment during the busy season, then drop back to the interest-only payment during the rest of the year. The danger of these loans is that a borrower may get in over his head with a home he can’t really afford.
Some Terms to Know
X/Y: ARMs are often referred to this way. X is the number of years the initial interest rate applies before the first adjustment happens (com- monly 3, 5, 7, and 10 years), and Y is the interval between adjustments (commonly 1 for one year and 6 for six months). For example, a 5/1 ARM means that the initial interest rate applies for five years, after which the interest rate is adjusted annually.
Start Rate: the introductory interest rate the borrower pays for the first fixed-interest period.
Period: the length of time between interest rate adjustments. If interest rates are falling, a shorter period benefits the borrower. If interest rates are rising, a longer period benefits the borrower.
Mortgage Loans 11