A 2/28 Adjustable-Rate Mortgage (2/28 ARM) is a type of adjustable-rate mortgage (ARM) that has a fixed interest rate for the first two years of the loan, after which the interest rate adjusts annually. The “2” in the name refers to the number of years the initial fixed interest rate lasts, and the “28” refers to the number of years over which the loan amortizes.
The initial interest rate on a 2/28 ARM is typically lower than the rate on a traditional 30-year fixed-rate mortgage. However, after the initial two-year period, the interest rate on the loan can adjust based on an index, such as the London Interbank Offered Rate (LIBOR) or the Treasury Bill rate. This can cause the interest rate on the loan to increase, resulting in higher monthly payments for the borrower.
One of the main advantages of a 2/28 ARM is that it can provide a lower interest rate and lower monthly payments in the short-term. This can make it easier for borrowers to qualify for a larger loan or a more expensive home.
However, it’s important to keep in mind that the interest rate on a 2/28 ARM can increase after the initial two-year period, which can make the monthly payments unaffordable for some borrowers. It’s also important to keep in mind that the interest rate on the loan can adjust based on an index, which is subject to market fluctuations.
It is always recommended to consult with a mortgage professional or financial advisor to determine if a 2/28 ARM is the best option for you based on your unique financial situation and goals.
Difference Between 2/28 ARM vs. Fixed Rate Mortgage
A 2/28 Adjustable-Rate Mortgage (2/28 ARM) and a fixed-rate mortgage (FRM) are both types of mortgages, but they have distinct differences in terms of interest rate and payments.
A 2/28 ARM has a fixed interest rate for the first two years of the loan, after which the interest rate adjusts annually based on an index such as the London Interbank Offered Rate (LIBOR) or the Treasury Bill rate. This means that the interest rate and the monthly payments can change after the initial two-year period.
A fixed-rate mortgage, on the other hand, has a fixed interest rate for the entire term of the loan. This means that the interest rate and the monthly payments will remain the same for the entire life of the loan.
The main advantage of a 2/28 ARM is that it can provide a lower interest rate and lower monthly payments in the short-term. This can make it easier for borrowers to qualify for a larger loan or a more expensive home.
The main advantage of a fixed-rate mortgage is the predictability and stability of payments. The borrower will know exactly how much they will pay every month, and this can help with budgeting and planning.
It is important to keep in mind that with a 2/28 ARM, after the initial two-year period, the interest rate and monthly payments may increase, which can make it unaffordable for some borrowers.
It’s always recommended to consult with a mortgage professional or financial advisor to determine which type of mortgage is the best option for you based on your unique financial situation and goals.
pros and cons of Adjustable-Rate Mortgage?
An Adjustable-Rate Mortgage (ARM) is a type of mortgage loan in which the interest rate changes periodically based on an index, such as the London Interbank Offered Rate (LIBOR) or the Treasury Bill rate. Here are some of the pros and cons of an adjustable-rate mortgage:
Pros:
- Lower initial interest rate: ARM typically have a lower initial interest rate than a fixed-rate mortgage. This can make it easier for borrowers to qualify for a larger loan or a more expensive home.
- Lower monthly payments: The lower interest rate in the initial period can result in lower monthly payments.
Cons:
- Interest rate risk: The interest rate on the loan can adjust based on an index, which is subject to market fluctuations. This can cause the interest rate and monthly payments to increase, which can make it unaffordable for some borrowers.
- Negative amortization risk: When the interest rate is adjusted and the new rate is higher than the old rate, the difference between the interest rate and the actual loan payment may be added to the loan balance, resulting in negative amortization.
- Harder to plan and budget: The uncertainty of the interest rate and monthly payments can make it harder for borrowers to plan and budget.
It is important to keep in mind that an ARM may be suitable for some borrowers, but not for others. It is always recommended to consult with a mortgage professional or financial advisor to determine if an adjustable-rate mortgage is the best option for you based on your unique financial situation and goals.
