2/28 Adjustable Rate Mortgage - A 2/28 arm is a mortgage that has a fixed rate for the first two years, and then the interest rate adjusts for the next 28 years. This completes the full 30 year term of the loan.
These types of mortgages help make the payment lower than a traditional 30 year fixed. You will want to make sure you understand the cap limits and margin so that you are prepared for the first adjustment. Your fully adjusted rate will be the current index plus the margin which was set at the closing of your loan.
The 2/28 is used quite often as a "band-aid", or 2 step type of loan. What is meant by this is, many people who are put on a 2/28, are put on the loan as a temporary thing with the intention of refinancing in the next 2 years. These types of loans are used quite often by sub-prime lenders to get borrowers into a home at a lower rate and payment upfront for the first 2 years, and then once a borrower has had a chance to establish more credit or repair their credit they can look into qualifying for a mortgage with a great fixed rate.
Because the initial interest rate of a 2/28 is often lower than a 30-Year Fixed Rate Mortgage (FRM), many property investors who look to sell the house within the next years usually prefer the 2/28 ARM. These types of home buyers often know that they would not keep the mortgages beyond the 2-year fixed rate periods.
When you are purchasing a home, the 2/28 is often times used as an 80/20. The 2 year ARM is the 80%, and the 20% is often times a 15 year fixed with a 30 year amortization (balloon payment). The 2/28 is great for 100% purchase transactions.
Verify the pre-payment penalty term when closing.
2/28 ARMS will have a ceiling rate that is often times upwards of 13%. This means that your rate could potentially go as high as the ceiling rate over time if you do not refinance out of the mortgage.
Some lenders will offer the broker a rebate if the prepay is longer then the 2 year term. Make sure you work with an honest mortgage professional.
The 2/28 loan is what they call a hybrid mortgage. It's a combination of the fixed rate and adjustable rate mortgages.
Make sure that you do not have a 2/28 ARM with a 3-year pre-payment penalty. You will have to pay the prepayment penalty if you want to refinance after the 2-year fixed interest period.
The 2/28 ARM is considered a temporary loan and is very commonly offered by the subprime mortgage lenders. If you have never owned a home before, and your credit is less than perfect, the 2/28 ARM might be your only choice to get you out of the renting rat race and into a home. Most people refinance out of the 2/28 ARM after the end of the 2 years into a better low mortgage rate loan.
Is an ARM the right loan for me? - Deciding if an Adjustable Rate Mortgage (ARM) is right for you will depend on your personal financial situation. Once your financial goals are decided then the terms of the ARM will also come into play with your decision.
If the ONLY way you can afford a mortgage is to look at an adjustable rate mortgage, or ARM, that program may not be in your best long term interest. If you can't afford the payment today if it was at the payment after adjustment, should you really put your name on THAT dotted line?
One of the most important things to think about when considering an ARM on your property revolves around how long you plan to keep the home. It's common now for homeowners to not plan to keep the home for more than 3-5 years. If this applies to you, taking a 3-year or 5-year ARM can significantly lower the interest rate on your home, saving you money each month over the typical 30-year fixed program.
If you are in a starter home and plan on moving within 5 years, an ARM Loan may be your best bet. You can enjoy the savings while in the property and sell before ever having an adjustment in rate.
Keep in mind that you will have to pay closing costs if you'd like to refinance that ARM into a fixed rate mortgage. If you originally bought the home with little or no money down, you may not have enough equity in your home to include the closing costs when it comes time to refinance.
It is important to compare the rates on the different types of ARM's regardless of how long you plan to be in the home. For example even if you are planning to move in 3 years, you may be able to get a better rate on a 5 year ARM than a 3 year ARM.
The advantage of an Adjustable Rate Mortgage (ARM) is that in most cases it offers a lower interest rate than its Fixed Rate counterpart. However, in some economic climates where the shorter interest rates are not lower than long term rates, such advantage is wiped out, and getting an ARM actually offers no benefits.
How tolerant are you to risk? Fixed rate mortgages offer security because the payment does not adjust, but this peace of mind comes at a cost: fixed rate mortgages often carry a higher interest rate than an adjustable rate mortgage. If you are confident that you know how long you will be in your home, or if you like the idea of increased cash flow due to a lower mortgage interest rate, be sure to ask your mortgage broker if an adjustable rate mortgage makes sense for you.
ARM / Adjustable Rate Mortgage loans which are reaching the end of their fixed period may present a substantial risk to borrowers who don't like the idea of their payments increasing by as much as 25% or more. Because many of the Adjustable Rate Mortgages from the last several years have very high "initial adjustment caps", borrowers can see their rates jump by as much as 6%, which in many cases can more than double your mortgage payment. Refinancing the adjustable ARM mortgage into a fixed rate mortgage eliminates the risk of payments rising over time entirely, and fixed rate mortgages are priced at very affordable rates compared with ARM mortgages today.
Things happen in life, when considering an adjustable rate mortgage, or ARM, ask your broker what the payment will be if you can't refinance it before it adjusts. If you can't afford that, an ARM may not be in your best interest.
Before selecting an adjustable rate mortgage, or ARM, make sure that if it adjusts before you can refinance that you will be able to afford the new, higher payment.