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.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.
Verify the pre-payment penalty term when closing.
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.
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.
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.
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.
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.
3 Year Fixed Rate Hybrid Mortgage - 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".
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.
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.
Why Should I Get An Adjustable Rate Mortgage? - Many borrowers are given an adjustable rate mortgage (ARM) but often times this type of mortgage may not be right for them. The interest rates on Adjustable rate mortgages fluctuate depending on which index is being used to calculate the rate. The typical adjustable rate mortgage (ARM)often have fixed periods of 2 to 5 years where the rate stays the same. However, after these fixed periods the rate may jump substantially. Borrowers should only get into an ARM after thinking it over very carefully.
Make sure that you fully research your options with ARM's. If you plan to sell in four or five years, a 2 year fixed loan would probably not be best for you. On the other hand, a 30 year fixed might have too high of an interest payment, while a 5 year fixed ARM sounds just about right.
If you are getting an Adjustable Rate Mortgage then you will want to make sure that you know how your mortgage will adjust. For instance some mortgages can adjust up to 5-6 percent after the initial fixed period meaning that your payment could dramatically increase right away instead of gradually increasing. So make sure to ask what your caps, margin and index are for your ARM.
If you know that you will be living in the subject home for a long time, an Adjustable Rate Mortgage (ARM) is usually not a good option. Fixed Rate Mortgages (FRM) are often better for home buyers who will be keeping the mortgage for most part of the loan term.
If you know you will be living in the home for only a couple years, or you will be refinancing within the next few years, an ARM loan may be your best option. They generally have a lower interest rate than fixed rate mortgages, during the initial fixed period. A lower rate means a lower monthly payment.
