Facing a Hybrid ARM Payment Increase? Resetting with a Combo Loan Could Be A Viable Option!
If you’re a homeowner who took out a Hybrid Adjustable-Rate Mortgage (Hybrid ARM) with an introductory fixed rate when interest rates were low (most notably between 2018-2020), you have likely seen your monthly payments rise by 40-50% or more. While Hybrid ARMs offer an initial fixed period followed by rate adjustments, many borrowers are now facing steep payment increases. But what if there was a way to avoid a drastic hike while keeping your monthly payment more manageable—or even the same as before?
Enter the Combination Refinance Strategy—a potential solution for homeowners facing Hybrid ARM payment resets that allows them to close on two loans simultaneously. This strategy provides the flexibility to pay off an existing ARM, reduce or maintain monthly payments, and, in some cases, tap into additional home equity.
In this article, we’ll explore how offsetting or eliminating the increase on a monthly Hybrid ARM payment with a combination of two unique product offerings can work, when it makes sense, and the pros and cons to consider.
What is a Hybrid ARM?
A Hybrid Adjustable-Rate Mortgage (Hybrid ARM) combines features of both fixed-rate and adjustable-rate loans. It offers an initial fixed interest rate for a set period (usually 3, 5, 7, or 10 years), after which the rate adjusts periodically based on market conditions. The rate adjustments are typically based on an index plus a margin, often resulting in significant payment increases if rates rise.
For example, a popular Hybrid ARM index is the Secured Overnight Financing Rate (SOFR), which was below 1.8% in 2018, below 1.6% in 2019, and under 0.10% during 2020-2021 but peaked at over 5.35% in 2024 before settling below 4.40% recently. This means borrowers who started with a 3-4% rate on their Hybrid ARM are now facing 7-8% rates, leading to substantial increases in their monthly payments.
The initial interest rate of a Hybrid ARM is typically lower than that of a fixed-rate mortgage, making it an attractive option for borrowers looking to take advantage of short-term savings. However, once the fixed period ends, the rate adjusts based on the selected index—such as SOFR or the Constant Maturity Treasury (CMT)—plus a margin set by the lender. The margin is a fixed percentage added to the index rate to determine the new interest rate. While the initial lower rate provides affordability, borrowers must prepare for potential increases if market rates rise.
Mortgage lenders design Hybrid ARMs to balance predictability and flexibility. During the fixed period, borrowers benefit from stability, but once adjustments begin, interest rates are subject to economic conditions. If market rates decline, borrowers may see only modest changes, but in a rising-rate environment, like the one seen in recent years, mortgage payments can escalate significantly. This unpredictability makes it crucial for borrowers to assess whether refinancing into a combination loan or another fixed-rate option is the right move for their financial future.
Newfi’s Combination Loan Strategy in Action
Mary’s Hybrid ARM Reset Challenge
Consider Mary, a borrower who opted for a 5/1 Hybrid ARM at 3.5% in 2018. Under the terms of her loan, her rate could reset up to 2% higher at the first reset, then adjust every six months, with a lifetime cap of 8.5%. Due to rising rates, her monthly payment has surged by 144%:
- Home Value at Closing: $900,000
- Original Loan Amount: $600,000
- Original Monthly P&I at 3.5%/4.361% APR: $2,694
- Current Monthly P&I at 7.25%/$8.312% APR: $3,880
- Maximum Possible P&I: $4,311
- Current Principal Balance: $537,435
- Current Home Value: $1,170,000 (30% appreciation since 2018)
Mary is a responsible borrower with strong equity, but her payment increase of $1,186 per month is straining her budget. She wants to maintain her payment without depleting savings. What are her options?
How the Combination Loan Can Help
Instead of refinancing into a traditional fixed-rate loan with today’s higher rates, Mary can use Newfi’s Sequoia and EquityChoice loans together to return to her 2018 mortgage payment:
- $446,000 Sequoia Loan (7.25%/ 7.332% APR Interest-Only): $2,694 Monthly Payment
- $132,435 EquityChoice Loan (No Monthly Payment):
Mary keeps her monthly payment at $2,684 for the next 10 years, matching her original 2018 payment. Additionally, she could borrow less under the Sequoia loan to lower payments further or take out more equity with EquityChoice while maintaining affordability.
When Does This Strategy Make Sense?
The Combination Loan Strategy can be a smart move if:
- Your Hybrid ARM is resetting at a much higher rate, causing a significant spike in payments.
- You have substantial home equity, making it easier to qualify for a flexible refinance option.
- You need short-term payment relief before selling or making other financial moves.
- You want to cash out equity while keeping monthly payments manageable.
Potential Downsides to Consider
- The Sequoia loan includes a 10-year Interest-Only period, but after that, the monthly payment increases.
- The EquityChoice loan matures in 10 years, requiring either payoff or refinancing.
- Borrowers may face higher overall financing costs after 10 years, depending on home prices and rate trends.
Conclusion
Resetting a Hybrid ARM mortgage payment increase with a Combination Loan Strategy can be an effective way to stabilize payments and maintain financial flexibility. However, this solution isn’t for everyone. It’s essential to weigh the pros and cons carefully and consult with a mortgage professional.
If you’re considering a Combination Loan Strategy, researching different options—or chatting with a Newfi loan officer—can help you determine the best path forward. Call 855-870-8889 to speak with a licensed expert about your Hybrid ARM refinance options.
At the end of the day, navigating an ARM reset requires thoughtful planning. Exploring flexible mortgage solutions like Sequoia and EquityChoice can help you regain control of your financial future.
Disclaimer: APR for loan scenario was calculated using https://www.bankrate.com/mortgages/annual-percentage-rate-arm-calculator/ with the starting interest rate of 3.5% and current index of 7.25%. The APR for Newfi’s Sequoia Loan is a 30-Year, Interest Only pulled on 2/5/2025.
*See terms and conditions that apply to any Shared Appreciation amounts your client may owe on the Newfi EquityChoice Loan at Newfi.com/Equitychoice.