Hybrid Commercial Loan ARMs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM)
Hybrid ARM Commercial Mortgages, also called fixed-period ARMs, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid commercial loan starts out with an interest rate that is fixed for a period of years (usually 3, 5, 7 or 10). Then, the loan converts to an ARM for a set number of years. An example would be a 30-year hybrid with a fixed rate for seven years and an adjustable rate for 23 years.
The beauty of a fixed-period ARM is that the initial interest rate for the fixed period of the loan is lower than the rate would be on a mortgage that’s fixed for 30 years, sometimes significantly. Hence you can enjoy a lower rate while have some period of stability for your payments. A typical one-year ARM on the other hand, goes to a new rate every year, starting 12 months after the loan is funded. So while the starting rate on ARMs is considerably lower than on a standard mortgage, they carry the risk of future hikes.
Commercial Property owners can get a hybrid and hope to refinance as the initial term expires. These types of loans are best for people who do not intend to own their commercial property for a long period of time. By getting a lower rate and lower monthly payments than with a longer-term fixed rate loan, they can break even more quickly on financing costs. Since the monthly payment will be lower, borrowers on commercial property loans can make extra payments and pay off the loan early, saving thousands during the years they have the loan. Of course, a borrower does need to be cognizant of any prepayment penalties the loan/note may carry.