Home Loans: Hybrid Mortgages

Hybrid loans include the following types of loans:

• Piggy Back Loans: These loans allow buyers to purchase homes with smaller down payments and/or to avoid private mortgage insurance. Two loans are approved concurrently - the first mortgage (which is usually 80% of the value of the property) and the second mortgage (equal to 10-20% of the value), with the down payment making up the difference. One benefit with this type of loan is that overall monthly payments will usually be less than those made with a loan that requires private mortgage insurance.
• Convertible ARM's: These loans give the buyer the option of later converting to a fixed rate and alleviates some of the risk involved with fluctuating interest rates. However, converting to the fixed rate may involve some kind of fee and the rate will most likely be higher than standard fixed rates.
• Two-step Mortgages: These mortgages are specialized ARM's that adjust at either five or seven years. After the adjustment, the rate will then remain fixed for the rest of the life of the loan. The new rate will never go above six percentage points higher than the initial rate, but the rate can drop as the market changes. Two-step mortgages are similar to fixed rate mortgages but have an automatic refinance built in.
• Convertible Loans: These loans will act like fixed rate loans during their first three, five, or seven years. They generally have a lower interest rate at first, but then turn into adjustable rate mortgages. If income is expected to increase or if interest rates are likely to fall during the first phase of the loan, a convertible loan would be a smart choice.
• Balloon Mortgages: These short term fixed-rate loans begin with low, fixed payments, then end with one large payment of all remaining principal at the end of five, seven or possibly ten years. Such a loan can be a smart choice if the buyer plans to remain in the home for just a few years and desires to keep housing costs low. The final payment can grow to be quite large, however, and may require refinancing.
• Graduated Payment Mortgages: These mortgages offer smaller payments in the beginning which rise regularly and level off after approximately five years. Recommended for buyers who expect income to rise significantly in the future years. The loan principal has been known to increase in these types of loans.