What is a Hybrid Mortgage?
Potential homeowners are often looking for the best options to give them the lowest interest rate while being able to borrow the most money. Someone looking to purchase a home for a few years may want to consider using a hybrid mortgage, which is a combination of fixed rate and variable rate loans.
When using a fixed rate mortgage, the borrower knows how much their interest rate will be throughout the life of the loan, usually 30 years, but the rate is often higher than when using adjustable rates. An adjustable rate loan (ARM) often starts lower but can be riskier in the long-term if market rates increase.
A hybrid allows someone who is planning on being in a home for a short time to receive a loan at a lower interest rate. These can be ideal for someone who is beginning their climb up the career ladder and believes they will want a different home in a couple of years. A hybrid loan provides the opportunity for lower interest rates on larger loans at the outset of the mortgage. The benefits and consequences of such a mortgage should be considered before signing the paperwork.
Benefits
- The fixed rate period can be for three, five, seven or 10 years.
- In the first few years, the interest rate on a hybrid loan is lower than that for a fixed rate contract. For example, a hybrid loan in which the fixed rate lasts for five years and then adjusts annually, the initial interest rate is often a full percentage point below that for a 30-year fixed loan.
- They offer the buyer the chance to borrow a larger amount of money at a lower interest than they normally would.
- If market rates decrease after the fixed rate period is up, the borrower’s rate will also decrease, thus lowering their monthly payments.
Consequences
- The initial fixed rate of a hybrid loan is usually a little higher than that for typical one-year adjustable interest rate loans.
- After the fixed rate period ends, the rates will adjust, usually increasing. This will cause monthly payments to rise. Since the rates can be adjusted on an annual basis, it can be difficult to budget for the monthly payments.
- Those entering into a hybrid loan anticipating selling the home before the fixed rate period expires could find themselves taking a loss if home prices decrease.
A 30-year fixed rate home mortgage is a safer, less glamorous option for securing a home loan. The borrower knows how much to budget for monthly payments over a long period of time. This type of loan makes more sense for someone who plans on staying in the same house for a long time.
A hybrid loan may be a better option for someone who plans on selling the house or refinancing the loan prior to the end of the fixed rate period. Hybrid loans should only be considered by those who have done proper research and have developed a solid plan to avoid the higher interest rates.
Katherine Watkins enjoys writing about personal finance topics such as mortgages and home equity loans. She believes it is important for homeowners to do careful research and seek professional advice before borrowing money, so that they choose the best option for their circumstances.
How To Improve Your Credit Score
By Karen Boies
Your credit score is a judgment about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers. There are many different ways to work out credit scores. The credit-reporting agencies Equifax and TransUnion use a scale from 300 to 900. High scores on this scale are good. The higher your score, the lower the risk for the lender. Lenders may also have their own ways of arriving at credit scores. In addition, lenders must decide on the lowest score you can have and still borrow money from them. They can also use your score to set the interest rate you will pay.
Which parts of a credit history are most important?
35% – Your Payment History
30% – Amounts You Owe
15% – Length of Your Credit History
10% – Types of Credit Used
10% – New Credit
Top 5 tips for improving your credit
1. Pay your bills on time.
Pay your bill in advance of the due date, ensuring it reaches the creditor before the payment is due. Pay off debt, don’t move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.
2. Contact your creditors as soon as you know you will have a problem paying bills on time.
Try to work out a payment arrangement and negotiate with them to keep at least a portion of the late notations off of your credit reports.
3. Reduce the number of active credit cards to 2 or 3 accounts.
Revolving credit includes department store cards, grocery store cards and gas cards. Establish a minimum of 2-3 trades with good repayment history for 24 months.
4. Keep account balances within 50% of the available credit limit.
Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.
5. Pay or satisfy all outstanding collections and judgements.
It is advisable to avoid applying for credit and having your credit report checked unless you have a genuine need for credit. The risk to consumers with a lot of activity on their credit report over a short period of time is that a lender may interpret this as a sign that you are in financial difficulty or taking on more debt than you can manage. Fortunately most scoring systems will not penalize you if they determine that you are shopping for the best rate on a particular product like a mortgage.
Your credit score is important and you need to take action to make sure that you will be able to borrow money when you need it. If you currently have a low credit score don’t be discouraged. Take action. Start doing the things that will cause your credit score to improve. Be consistent and before you know it you will have better credit.
Karen Boies is a mobile mortgage planner in Greater Vancouver. If you have any questions about your credit score or about getting a mortgage, please call Karen at 604-726-9550 or email at Karen@mortgagecentrecitywide.com
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