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 rate mortgage. 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.
