Like Adjustable Rate Mortgages these variants are still not fixed for the entirety of the loan’s lifespan, like a fixed rate mortgage is, but also contain a key factor that makes them differ from the normal definition of an Adjustable Rate Mortgage. These three variants are; Hybrid Adjustable Rate Mortgages, Option Adjustable Rate Mortgages, and Cash Flow Adjustable Rate Mortgages.
What is a Hybrid Adjustable Rate Mortgage?
A Hybrid Adjustable Rate Mortgage is a combination of a Fixed and Adjustable Rate Mortgages, thus the moniker of Hybrid. Hybrid Adjustable Rate Mortgages are referred to by their initial fixed rate period and then their subsequent adjustable rate period. For example if a Hybrid Rate Mortgage has a fixed period of ten years before the change over to the adjustable period, which is a period of twenty years the Adjustable Rate Mortgage will be referred to as a 10/20 ARM. The initial date upon which the interest rate switches from fixed rate to the adjustable rate is known as the reset date. Once the reset date takes effect the interest rate is still subject to any index that the lender assigns it too.
What is an Option Adjustable Rate Mortgage?
Also known as a “pick a payment” or “pay option” an Option Adjustable Rate Mortgage is another variation of an Adjustable Rate Mortgage. Option Adjustable Rates are often couple with a variety of choices as to scheduled payment plans with the basics usually being, a specific monthly minimum payment, a interest only payment, a 15 year fully amortized payment and a 30 year fully amortized payment. These are often offered with a very low initial interest rate, also called a teaser rate, which drastically lowers the standard of credit scores for any applications. One should look past the teaser rate or even the initial payment level and instead focus on the index that is being used to base the level of interest growth, and the overall growth trend that is attributed to it. Other factors to consider are:
- Long-term interest rates may go up,
- The property in question may devalue or never appreciate value,
- Both of the afore mentioned risks occur.
For these reasons Option Adjustable Rate Mortgages are best suited for individuals who expect their income to continue growing along with their career path, as the reliance on market trends could be damaging if not kept in check.
What is a Cash Flow Adjustable Rate Mortgage?
Another variant of an Adjustable Rate Mortgage, a Cash Flow ARM is a minimum payment option mortgage loan, allowing the borrower to choose a monthly payment plan with several interchangeable features. These options are normally a minimum payment, a interest only payment, a 15 year payment or a 30 year payment. A minimum payment is normally smaller then a purely interest only payment but can result in the bank holding a greater lien on the property in question. Which can disable a borrowers potential to sell the moan for the amount that would cover the loan, if the situation that allowed the borrowing changed.