Question:

Which is better - the 3/1 or the 3/6 hybrid ARM (adjustable rate mortgage) loan?

Answer:

A hybrid ARM (adjustable rate mortgage) loan is one that keeps a fixed low rate for a limited time, and then begins to adjust annually or biannually.

The 3/1 and 3/6 loans are hybrid ARMs with the low rate fixed for 3 years. The 3/1 loan rate will adjust annually, and the 3/6 ARM rate will adjust every six months (possibly tied to the 6-month LIBOR index).

When is the 3/1 hybrid ARM (adjustable rate mortgage) loan better than the 3/6 ARM?

When selecting an ARM, borrowers should seek greater stability and less volatility of the ARM indexes. That is, an ARM rate resetting every month is much less preferable than a rate adjusting once a year especially when rates are rising. Even if sometimes the rate goes down following the movement of ARM indices, ARM rates more often go up and result in payment shock for most borrowers. That is why a 3/1 hybrid adjustable rate mortgage will be a better choice than the 3/6 hybrid ARM in rising rate times.

Also, imagine you have a prepayment penalty of $15,000 should you refinance before the 5th year of your loan- then a 3/1 hybrid ARM (adjustable rate mortgage) loan will have its rate reset two times less often than the 3/6 ARM. That is, you will save money with the 3/1 ARM if rates are rising until you are waiting to refinance.

Just the opposite - the 3/6 ARM will be the better shot if rates are dropping. If you are willing to take that gamble, you could strike it with a hybrid ARM adjusting every six months. First-time home buyers, however, are discouraged from adventurous takes with their mortgage loan.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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