Hybrid adjustable rate mortgages (Hybrid ARM) are a type of mortgage whose interest remains fixed for a certain period then changes over time based upon a market index. In contrast, fixed rate mortgages made for 15, 20, or 30 years have a set amount of interest on the loan that does not change, and traditional ARMs automatically change the interest periodically without ever being fixed at a certain rate. Hybrid ARMs have a fixed interest rate for a specific amount of time. Then the interest rate starts changing according to the adjustment frequency. The difference of time between the fixed rate and adjustable rate periods are often expressed over one another. For example, a 5/5 ARM means the mortgage has a fixed interest rate for five years, then adjusts every five years. The amount of interest usually changes based upon a certain benchmark rate such as for certificates of deposit or the Secured Overnight Financing Rate (SOFR). The new interest rate will be the benchmark plus an agreed upon margin. For example, if the mortgage reaches an adjustment where the benchmark is at 5% and a margin of 1%, the new interest rate will be 6% until the next adjustment. Usually, parties agree to a maximum amount the interest rate can increase every period (cap) or over the entire life of the loan (ceiling). Many people choose Hybrid ARMs because they receive in the beginning less interest than a regular fixed-rate mortgage. However, as time passes, Hybrid ARMs may become more expensive than a fixed rate mortgage if markets cause interest to rise after the fixed period ends.
[Last updated in February of 2022 by the Wex Definitions Team]