What is a hybrid loan?

A hybrid loan is a type of loan that is a mixture of a fixed rate loan and adjustable-rate mortgage, or ARM. The term hybrid refers to the fixed period of the loan, which is typically 2 to 5 years.

Hybrid Loan Versus Interest-Only Loan

A hybrid differs from an interest-only loan, which also has a 5 to 10 year fixed period that adjusts upwards when principal payments begin because during the fixed period, more money is being put toward the loan, resulting in a higher level of equity and increased potential cash flow.

Negative Amortization

Like interest-only loans, the lower fixed rate portion resulted in an uneven amortization of loan costs that are normally distributed throughout the loan’s period in the case of a fixed rate loan. This results in negative amortization in the early years, which is only a problem if the value of the home or loan-to-value ration does not decrease.