What is the primary purpose of a Fixed/Adjustable Rate Note?

The primary purpose of a Fixed/Adjustable Rate Note, commonly known as a Hybrid ARM (Adjustable Rate Mortgage), is indeed to convert the interest rate from fixed to adjustable. This type of mortgage starts with a fixed interest rate for a specified period, typically ranging from 5 to 10 years, after which it adjusts periodically based on market rates. This feature allows borrowers to benefit from a lower initial fixed rate, which can make housing more affordable in the short term. After the initial fixed period ends, the interest rate adjusts, usually increasing or decreasing in relation to a specified index, reflecting changes in the broader market.

This approach provides borrowers with the stability of a fixed rate initially while also enabling variable rates that can lead to lower payments if market rates decline after the fixed period. This structure is tailored for those who may anticipate moving or refinancing before the adjustable period begins, capitalizing on the lower initial rates while acknowledging the potential for future changes.