Hybrid Adjustable Rate Mortgages (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM)
Commercial Hybrid Adjustable Rate Mortgages, also called fixed-period commercial 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 this rate difference is rather significant. Consequently, you can enjoy a lower rate while enjoying a period of payment stability. On the other hand, a typical one-year ARM adjusts to a new rate each year. This starts with the 12 months subsequent to loan funding. So while the starting rate on an ARM is considerably lower than on a standard mortgage, ARMs carry the risk of future rate increases.
Commercial Property owners can obtain 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 a longer-term fixed rate loan would offer, a borrower 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. This would potentially save thousands, if not millions, 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.