In short, a hybrid loan is a combination loan that consists of a fixed-rate loan and an adjustable-rate loan. Some lenders also call this a "two-step loan." The introductory interest rate is often very low to attract borrowers.

Low Payments an Advantage

A hybrid loan is used to give the borrower a lower monthly payment for a period of five to seven years until the adjustable-rate loan changes. This type of loan is often used in mortgage lending for borrowers who need low monthly payments and who intend to refinance before the adjustable rate portion changes.

Disadvantages

In most cases when the rate adjusts, the borrower’s monthly payments will increase. This can often leave the borrower unable to afford to continue to pay on the loan. If the borrower does not have the credit score required to refinance to a low fixed-rate loan, the loan can go into default. When you are choosing a hybrid mortgage, it is important to plan for higher payments when it is time for the rate to adjust. 

Controlling the adjusting rates can be achieved through a cap factored in to the loan agreement. If you can get the lender to agree to a certain cap, then your rate can never be adjusted over that percentage.

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