Hybrid ARM | Housing | Finance & Capital Markets | Khan Academy

ruticker 02.03.2025 23:23:34

Recognized text from YouScriptor channel Khan Academy

Recognized from a YouTube video by YouScriptor.com, For more details, follow the link Hybrid ARM | Housing | Finance & Capital Markets | Khan Academy

In the last video, we covered the basics of what an **adjustable rate mortgage** is and how it's different from a **fixed rate mortgage**. But you may have heard another term that seems to be a mixture of the two, and that's a **hybrid ARM** or **hybrid adjustable rate mortgage**. A hybrid, when we use that word, generally means a mix of things, and that's exactly what a hybrid ARM is—it's a mix of fixed and adjustable rates. So, what do we mean by a mix of a fixed and adjustable rate mortgage? Well, you might hear something like a **5/1 hybrid ARM**. What does that mean? Well, that means that for the first five years of the mortgage, it behaves like a fixed mortgage, and then after that, it becomes adjustable. In the case we used in the video on adjustable rate mortgages, we saw that as your benchmark one-year treasury rate fluctuates, your adjustable rate mortgage resets every year. If interest rates go high enough, it might become unfavorable relative to the fixed rate. In a **5/1 hybrid ARM**, what happens is that for the first five years, it's a fixed-rate mortgage. After that, it adjusts just like an adjustable rate mortgage. So, this is one, two, three, four, five—during the first five years, it's a fixed-rate mortgage, and then after that, it adjusts. If it had the same properties as the adjustable rate we saw in the video, then we start adjusting. So, the question is: why would someone want to do this? Why would a borrower want to do this, and why does a bank do it? When we talked about adjustable rate mortgages, we discussed the idea of **interest rate risk**. In an adjustable rate mortgage, a borrower takes on the interest rate risk. If interest rates go up, the borrower will have to pay more interest, but the lender is protected. On the other hand, for a fixed rate, if interest rates go up, it's the lender who has to take on that risk while the borrower is protected. With the hybrid, it's in between. For the first five years, the borrower is protected; they know what their payment is going to be for those five years. After that, it adjusts. From a lender's point of view, they might say, "Okay, we'll take on the interest rate risk for the first five years, but then after that, it floats, and the borrower takes it on." It's not even the case that the borrower necessarily has to take on this risk. It could be that the borrower is buying some type of property where they think they will either sell the property or refinance it. Especially if they think they're going to sell the property in the next five years, this could make a lot of sense, especially if they get a lower rate than they would have gotten with a fixed rate. For example, the rate that they might have gotten could have been lower than the fixed rate. In fact, very likely, for the same credit risk, it might have been a lower rate. After five years, the bank is taking on less of the interest rate risk, especially when you go beyond year five, and then it would adjust. So, the incentive is: if I think I'm going to sell this house or refinance it, which means taking out another loan to pay this loan off, it might make a lot of sense for me to do this. In a hybrid, both parties are mixing; they're both taking different pieces of the interest rate risk. Once again, depending on your scenario, it might make sense to consider something like a hybrid ARM if you feel very confident that you could either take on the variable interest rate risk that will happen after year five, or you think that this property is going to be something you might own for only the next five years, or that you might refinance in some way. Maybe you'll be able to pay it off—perhaps you're expecting an inheritance in year four, allowing you to pay off the property or the loan without worrying about all of this business.

Назад

Залогинтесь, что бы оставить свой комментарий