Many people are opting for hybrid mortgage loans as a way to get lower interest rates during these tough economic times.

These loans are called hybrid loans because they are somewhere in between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage. Those who use this type of loan will have a fixed interest rate for anywhere from 3-10 years, depending on the terms. Some are scared to get involved with an ARM or a hybrid, due to the fact that once the locked period is over, the interest rate can rise.

However, these loans are excellent options for those wanting to get into a loan with credit that is not exceptional. And generally when payments are made faithfully on a mortgage, the credit report will take a drastic hike. Because it is a major item on the credit report, it is a large deciding factor in the credit score. A hybrid loan also allows the borrower to get lower interest rates than they would be able to get with a fixed-rate mortgage.

People who start out with a hybrid loan can often refinance later on with a better rate, although this may involve penalties. While it is good for the fixed period, one needs to take into consider
ation the possible large increase in the size of the monthly payments after this period is over.

These loans have actually been around since the 1980s. When people became discouraged with ARM loans and were looking back into fixed rate loans, the hybrid option came into play. For those who will likely stay in the same house for 10 years or more, or who plan to move after only two or three years, a hybrid loan is probably not the best option. However, for those expecting to stay in their homes for a period of, say 4-7 years, a hybrid loan may be the right choice, as it allows the homeowner to sell or refinance the house before higher interest rates apply. This uncertainty about what interest rates will be like once the fixed interest term of the loan is up is the biggest drawback of a hybrid loan.

When considering a hybrid loan be careful not to make a choice based only on immediate desires, like wanting a very low monthly mortgage payment, and ignore the possibility that after the fixed interest rate term is up a much higher interest rate may make your mortgage payments prohibitively expensive. However, if you are going to be selling your house or refinancing before the fixed rate period on your hybrid loan is up, a hybrid loan may be right for you.