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Hybrid Option ARM

Mortgage Library: Types of Mortgage Loans: Option ARM: Hybrid Option ARM

There is a wide variety of adjustable rate mortgage programs with flexible payments, that we divide into categories in the following way:

1. Traditional 'regular' option ARMs: the most common form of option ARM with monthly rate adjustments that begin within 1 or 3 months of origination.

Some of these 'classic' option ARMs are: Washington Mututal's 1 Month Option ARM, Countrywide's PayOption ARM, World Savings' Pick-a-Paymentsm ARM.

2. Traditional 'fixed-period' option ARMs: at the beginning, the rate is fixed for a limited period (that can be the same as the fixed payment period).

For example, Washington Mututal's Flex 3 or Flex 5 Home Loan, Chevy Chase Bank's 5-Year Fixed Pay Cashflow ARM.

3. Innovative 'regular' option ARMs: traditional 'regular' option ARMs with some new features added: the new minimum payment calculation method, the Interest Only payment required at recast, etc.

4. Innovative 'fixed-period' option ARMs: traditional 'fixed-period' option ARMs with the same or similar modifications.

Indymac Bank's FlexPay® 12 MAT 1-Year ARM and FlexPay® 12 MAT 5-Year ARM may represent these innovations.

5. Hybrid Option ARMs.

Examples: GreenPoint's Five Year Fixed Rate OptPay ARM or Indymac's FlexPay® 7/1 LIBOR ARM

Hybrid option ARM loans, a relatively new combination of option ARMs and hybrid ARMs, enhance payment flexibility of the former, including potential for negative amortization, with rate stability of the later, by allowing borrowers to fix the interest rate for the first three, five or seven years after the note date.

Fixed Period

With Hybrid option ARMs, the following 'fixed periods' are available:

  • a.   Initial Interest Rate Period: the interest rate is fixed
    After the initial fixed rate period, the interest rate can change periodically to the index value, plus the margin.
  • b.   Initial Fixed Minimum Payment Period: the minimum payment is fixed
    After the initial fixed payment period, the minimum payment can change every year.
  • c.   Fixed Initial Rate / Fixed Minimum Payment Period: both the interest rate and the minimum payment are fixed

'Regular' 1-month option ARMs usually have a 1-month Initial Interest Rate Period.

'Hybrid' option ARMs may have either 'c', or a combination of  'a' and 'b'.

Examples:

1-Month Option ARM, 1-Month Initial Interest Rate Period, 5-Year Fixed Minimum Payment Period 6-Month Option ARM, 3-Year Fixed Initial Rate / Fixed Minimum Payment Period 1-Month Option ARM, 3-Month Initial Interest Rate Period, 7-Year Fixed Minimum Payment Period
The 1st interest rate change date may occur when the 1st payment is due.

Subsequent interest rate changes may occur each month thereafter.

The 1st payment change date may occur when the 61st payment is due.

Subsequent payment changes may occur each 12 months thereafter.

The 1st interest rate change date may occur when the 37th payment is due.

Subsequent interest rate changes may occur each 6 months thereafter.

The 1st payment change date may occur when the 37th payment is due.

Subsequent payment changes may occur each 12 months thereafter.

The 1st interest rate change date may occur when the 3rd payment is due.

Subsequent interest rate changes may occur each month thereafter.

The 1st payment change date may occur when the 85th payment is due.

Subsequent payment changes may occur each 12 months thereafter.

Loan Re-Amortization (Recasting)

With hybrid option ARMs that have a payment options period, the new payment required at Neg-Am  Recast is the interest-only payment, not the fully amortizing payment. If there is a 10-year payment options period, the interest only and the minimum payment options can only last to the 10th year (if the negative amortization cap is not reached earlier). At the end of the payment options period, only fully amortizing payments are allowed.

Some lenders offer another hybrid option ARM loan type, that doesn't have payment options period and requires the fully amortizing payment at recast.

Caps

Most hybrid option ARM loans, unlike regular option ARMs, have both first interest change cap and periodic interest change cap. With these programs, the minimum payment adjustments are not capped after the initial fixed rate period, (i.e. there is no payment cap)*.

*There is a variation of hybrid option ARMs, that does have a payment cap and works like regular option ARMs.

Every option ARM loan program (including both hybrid and standard versions) has a lifetime cap that limits the interest rate increase over the life of the loan.

Minimum Payment Calculation

The following method (1) is used with the most common form of option ARM with monthly rate adjustments that begin within 1 month of origination: the minimum payment is based on the original loan amount amortized over the original loan term using the start rate.

With hybrid option ARMs, the minimum payment is usually calculated either as a percent of the fully amortizing payment (2), or, with some loan programs, using the minimum payment rate (3), that is set at several points below the fully-indexed rate.

The minimum payment, calculated as a percentage of full payment, may vary from 50% to 70%. The minimum payment rate is usually set at 3 - 5 points below the fully-indexed rate.

5/1 Option Arm Standard Option Arm
Initially, the minimum payment is calculated as a percent of the fully amortizing payment. Initially, the minimum payment rate is set at 3 points below the fully-indexed rate. Initially, the minimum payment is calculated using the start rate, the loan amount and the loan term.

Loan Terms:
Loan Amount: $200,000.00
Fully-Indexed Rate = Initial Rate: 7.75%
Full Payment  = $1,432.82
Discount Percentage: 55%

Minimum Payment: $788.05 = $1,432.82 x 0.55

Loan Terms:
Loan Amount: $200,000.00
Fully-Indexed Rate = Initial Rate: 7.75%
Discount: 5%
Minimum Payment Rate: 2.75% ( = 7.75% - 5%)

Minimum Payment: $816.48

Loan Terms:
Loan Amount: $200,000.00
Fully-Indexed Rate: 7.75%
Initial Rate: 1.25%
Payment Cap: 7.5%

Minimum Payment: $666.50

Minimum Payment Changes
The minimum payment remains unchanged during the initial fixed rate period. The minimum payment is recalculated annually.
Year 1 $788.05 = $1,432.82 x 0.55
Year 2 $788.05 = $1,432.82 x 0.55
Year 3 $788.05 = $1,432.82 x 0.55
Year 4 $788.05 = $1,432.82 x 0.55
Year 5 $788.05 = $1,432.82 x 0.55
Year 1 $816.48 computed
using the
minimum
payment
rate: 2.75%
Year 2 $816.48
Year 3 $816.48
Year 4 $816.48
Year 5 $816.48
Year 1 $666.50 computed @ start rate
Year 2 $716.49 = $666.50 + 7.50%
Year 3 $770.22 = $716.49 + 7.50%
Year 4 $827.99 = $770.22 + 7.50%
Year 5 $890.09 = $827.99 + 7.50%

Due to the method that is used to compute the minimum payment and the fact that the interest-only payment (not the fully amortizing payment) is required at recast, hybrid option ARMs are believed to have the ability to soften potential payment shock for borrowers who always select the minimum payment option.

Mortgage Professionals Offering Option ARM Loans

If you are looking for an option ARM and need more information or advice, we invite you to take advantage of our database of the most competitive lenders, brokers and loan consultants available. Just complete a short loan request form and the best mortgage professionals in your local area offering option ARM loan programs will contact you with their rates and fees.

FlexPay® is a registered trademark of IndyMac Bank, F.S.B and/or its subsidiaries. Pick-a-Paymentsm is a service mark of World Savings. Washington Mutual® and the Washington Mutual logo are registered trademarks of Washington Mutual, Inc. PayOption is a service mark of Countrywide Financial Corporation and/or its subsidiaries. OptPay is a trademark of GreenPoint Mortgage Funding, Inc. (GPMF) and/or its subsidiaries. CashFlow Option Loan, Flex 3 Home Loan, Flex 5 Home Loan, and all other trade/service marks are the property of of their respective owners. Mortgage-X is not sponsored by, endorsed by or affiliated with IndyMac Bank, World Savings, Countrywide, Chevy Chase Bank, Downey Savings, GreenPoint Mortgage or Washington Mutual, Inc.

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