A type of home loan where the interest rate stays the same for the first 3 years of the loan term, thereafter the interest rate is adjusted periodically. Depending on the indices used, after the initial fixed rate period, the interest rates of most 3-Year Fixed Rate Hybrids adjust annually. The 3 Years Hybrid is sometimes referred to as the "3/1".
Under normal economic climate in the interest market, the longer the fixed period is, the higher the interest rate. In other words, a Hybrid with a 5-year fixed rate period has a higher interest rate than a Hybrid with only a 3-year fixed period. This rule also holds true with almost all interest bearing financial products, such as Certificates of Deposits. For instance, a 12-month CD almost always offers a higher Annual Percentage Yield (APY) than a 6-month CD.
A 3 year ARM may be a good solution if you only plan to live in your house for a few years. The lower rate offered by a 3/1 Adjustable Rate Mortgage also makes this loan popular for first time home buyers because it can be used to build higher credit scores during the initial fixed interest period.
3 Year ARM mortgages are available with interest only options. The 3/1 Interest Only mortgage is a popular choice for borrowers who are refinancing to lower their monthly payments, however 30 year fixed rate mortgages with interest only payments are becoming increasingly competitive with their 3 year adjustable rate mortgage counterparts.
With this type of loan there are caps for adjustments each year and for the life of the loan. When the adjustment period begins the rate could adjust up or down depending on the market conditions and the index the rate is based on.
This loan is also known as a 3/1 ARM Loan
On a 3 year arm your first adjustment will happen after you make your 35th payment. Usually the caps are set at 2/2/6, which limit the increases and decreases in your rate.