Hybrid Loans and Jumbo Loans
Hybrid loans won’t save you quite as much money as pure ARM (Adjustable-Rate Mortgage) but they are cheaper than a 30-year fixed rate mortgage and they limit your risk. They are especially popular among buyers who don’t plan to be in their new home for more than ten years. Hybrids give you a fixed interest rate for the first three, five, seven or ten years of the mortgage. At the end of that fixed-rate period, the loan converts to a one-year ARM for the rest of its life. These loans are often referred to numerically, like so: 3/1, 5/1, 7/1 or 10/1. The first number specifies the number of years the rate is fixed and the second indicates the adjustment period of the ARM that follows. Usually it’s a one year. That first adjustment can be pretty sizable, a typical cap is 5 or 6 percentage points over the original, fixed rate. For a hybrid with only a three-year fixed rate period, that initial cap is a little lower, just 2 percentage points over the starting rate. In following years, annual caps limit changes to 2 percentage points per year. The life-of-loan cap is 5 percentage points above your starting rate. If interest rates were to increase rapidly, you could reach the loan’s absolute top interest rate at the very first adjustment. But if you think you will only live in this house five years, a 5/1 ARM could be the perfect loan, if you think you might live there longer, the 7/1 or 10/1 might be the better match.
Jumbo loan is the term for loan amounts greater than $359,650 as of 2005. To understand jumbos and why they have the higher interest rates than smaller loans then you first need to understand a bit about two large corporations with the folksy names Fannie Mae and Freddie Mac. Fannie and Freddie buy mortgages from approved lenders and repackage them as bonds which are sold to investors around the world. But they can buy only conforming loans that meet certain standards which include limits on borrowers’ creditworthiness, the existence of consumer protections on the loans and on the dollar amount of the mortgage. That dollar amount ($359,650 in 2005) is called the conforming loan limit. Anything larger is jumbo. Although they cannot buy jumbos, other investors will and they demand higher interest rates. Translation for the homebuyer: your interest rate on a jumbo will be 1/8 to 3/8 percentage points higher than on a conforming loan. Every November, Fannie and Freddie announce the new limit that will go into effect at the begin beginning of the coming year. If you are buying a home in November or December and are just above the current jumbo threshold then it could pay to put off closing until the higher loan limits go into effect January 1. Then you can stay under that jumbo threshold and pay less interest.