Hybrid ARM's offer the consumer an interest rate that is fixed for an initial period of time then readjusts over the remainder of the life of the loan. These loans are a mix, or a hybrid, of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first few years of the loan. After the fixed interest rate expires, the interest rate starts to adjust based on an index plus a margin. 

Hybrid ARM's may be set with fixed-rate intervals of 3, 5, 7 or 10 years with the adjustable rate triggered on the reset date. After the reset date has been reached, the interest rate on the mortgage is typically assessed and recalculated on an annual basis. For example, a 7/1 ARM has a fixed rate for the first seven years, then converts to a 1 year adjustable after the reset date. There are also caps on the interest rate adjustments. Typically the initial adjustment cap is 2% above the start rate, unless the initial term is 5 years or longer, then the initial caps can be as high as 6%. The periodic or yearly caps are typically 2% above (or below) the existing rate and the lifetime cap is 5% or 6% above the initial fixed rate, depending on the term of the loan. 

Normally hybrid ARMs offer an interest rate that is substantially lower than that of a 15 or 30 year fixed rate mortgage. This provides the borrower economical payments and better monthly cash flow. Although most people opt for 30 year mortgages, very few actually stay in the property or the mortgage for that long. People move, families grow, life happens and for lots of other reasons, the lifespan of a mortgage tends to be far less than 30 years. A hybrid ARM is ideal for borrowers who plan to sell their homes within 7 to 10 years. Contemporary homeowners often feel that it makes little sense to pay for a fixed rate for 30 years when most will be out of their homes and loans long before then. Hybrid ARMs provide a combination of safety and savings that many homeowners find too attractive to pass up. 

Before you automatically opt for a 30 year fixed rate mortgage, take a moment and consider how long you intend to be in the property and if it's 10 years or less, you should take a long, hard look at a hybrid ARM!