CASE: Hybrid loans for home purchase have been gaining popularity in recent years. Unlike fixed rate loans where you monthly payment is fixed, hybrid loans have more complex payment schedule. In a hybrid loan the interest is typically lower at the beginning. This period is typically 2 to 7 years and the interest during this period is lower than a typical fixed rate. During this period the borrower only needs to pay the interest on the loan. However, if he/she wants to make a payment more than the minimum payment she is free to do so. After the initial low interest period, the interest rate on the loan becomes variable and it settles at a much higher rate. If you are planning to live in the house for a shorter period, the hybrid loan is particularly advantageous since payments in the early period are relatively lower. However, hybrid loans may turn into a time bomb if you end up staying in the house for a longer period and paying a higher interest. Ali is planning to buy his first home with a hybrid loan. He is not exactly sure about how long he will live in his new house as new career opportunities may require him to relocate to a new town. For this new apartment Ali will put down 200,000 TL as down payment and Ali's father will contribute another 100.000 TL. Ali is also planning to borrow 400,000 TL from a bank so that he can buy a nice 2 bedroom apartment for 700,000 TL. Ali has several loan options given below. Option 1. Fixed 1.6 % per month for 10 years. Option 2 Hybrid 1.0 % per month for the first 3 years. After three years, the interest readjusts to 2.5 percent with a minimum monthly payment of 2000 TL. The loan should be paid off within 10 years. Option 3 Hybrid 0.50 % per month for the first 2 years. The interest readjusts to 4% per month from year 2 to 10. The loan agreement will not allow any prepayment until end of third year. Ali is not sure how long he will stay in his new apartment. Help Ali to choose the best loan based on the scenario that he will live 2, 3, 5 and 10 years in his new apartment. Consider the fact that the banks currently pay 2.0 percent interest on saving accounts. Once Ali sells apartment, he has to pay the remaining principal (not the remaining interest) of the loan to the bank immediately. This will free Ali from any additional responsibility to the bank. Closing and opening a new loan cost 1500 TL