The Rise Of The Hybrid Adjustable Rate Mortgage
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Hybrid adjustable rate mortgages are making a comeback as an affordable option for borrowers.
The loan program debuted in the 1990s as a way to take advantage of lower fixed interest rates during an introductory period. Owners can turn to hybrid ARMs for lower rates and long-term financing.
Fannie Mae recently unveiled its 30-year hybrid ARM, touting increased flexibility. Multifamily borrowers can take advantage of a fully amortizing loan with options for a fixed rate in the first five, seven or 10 years, before converting to an ARM. Loans range between $3M and $5M, depending on the market and the number of units. The fixed rate is locked in at origination.
Hybrid ARMs come in a variety of fixed and adjustable rate period combinations. A 5-1 loan, for instance, offers borrowers five years of fixed interest rates, followed by annual adjustments for the remaining loan term. Interest rates are adjusted based on marginal rates and the indexes to which they are tied. Fannie Mae’s hybrid ARM margin stays at a competitive 0.8% during the adjustable term.
Unlike Freddie Mac’s hybrid ARM, Fannie Mae’s product can also be used to finance manufactured housing communities, in addition to smaller conventional loans for stabilized multifamily projects. Fannie Mae’s product does not have a balloon payment or a prepayment policy. Borrowers looking for long-term financing do not have to worry about large payments at loan maturity. Those who do not plan on retaining the asset for the duration of the loan term also have the flexibility to move on or refinance after moving into the adjustable rate period.
“If you decide to refinance or you decide to sell or pay off, you don’t have a prepayment penalty with Fannie,” Breheny said.
Interests rates can impact whether a hybrid ARM works for a borrower. Rates are determined based on the London Interbank Offered Rate, for now, which is the average of interest rates from each of the leading banks in London were they to borrow from other banks. Fannie Mae’s product takes its index from the six-month Libor.
“It really depends on the borrower,” Breheny said. "If they believe that Libor will remain low and rates will remain stable, it could be an opportunity to take an ARM."
Prior to the Great Recession, shifting rates for ARMs posed a risk for borrowers, who were at the mercy of volatile interest rates. Caps have since been put in place on periodic adjustments, making ARMs and hybrid products safer options. With Fannie Mae’s product, caps stay around a maximum semiannual interest rate adjustment of 1%, up or down, and a maximum lifetime interest rate capped at 5% over the initial fixed rate.
The security of the loans has made ARMs an appealing method to raise affordable capital.
Borrowers working with Fannie Mae’s Delegated Underwriting and Servicing lenders can rely on experts to help them find the hybrid ARM term that meets their needs. Hunt Mortgage Group, one of the select lenders approved under the DUS product to underwrite, close and deliver most loans without prereview, provides consistent and reliable service throughout the life of the loan.
“We do in-house servicing, we don’t have a subservicing group, we don’t outsource the servicing,” Breheny said. “It is all done by Hunt servicing in-house, and you have direct access to any Hunt servicing credit or origination staff to help you with any issue. You don’t have a random servicer handling your deal.”
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