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Pros and Cons of a 2/28 ARM
Author David Schneider | May 23,2007
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Ted was ready to buy a home. He had money put aside to cover his closing costs, he had a steady income and he had relatively good credit. When Ted examined his mortgage options, he learned that his credit score did not qualify him for Type A Paper loans, but it did qualify him for a number of exotic, non-traditional loans. One option he had was an 80/20 loan. This loan would allow him to get into the home that he wanted for around $4,000. Ted decided that this loan product was a good choice for him. However, he didn't want to carry a second mortgage for a long period of time because its interest rate would be nearly double the rate of the first mortgage. Since he intended to refinance his 80/20 loan in a couple of years he selected a 2/28 ARM interest structure instead of a fixed rate structure. This gave him two years to improve his credit before he tried to refinance his mortgage at a lower interest rate and for better terms.
What is a 2/28 ARM?
A 2/28 ARM is a 30-year adjustable rate mortgage that offers a fixed interest rate for the first two years of the mortgage. The second number in this ARM refers to the number of years that the mortgage will have an adjustable rate. In this case, there will be 28 years of adjustable interest rates.
Pros of a 2/28 ARM
There are many great characteristics of a 2/28 ARM. The first advantage is that it is an easier loan to qualify for than a traditional mortgage. This loan is a great option for people who have less than perfect credit and for people who are self-employed. The second advantage of this loan is that you can use it to purchase a home when you have less than perfect credit. It will then give you two years to build up your credit before refinancing your mortgage for better terms. People often refer to this loan as a “band-aid” mortgage because it is used to secure a property while the borrower corrects problems that kept them from qualifying for a traditional prime rate mortgage. Finally, the first two years of a 2/28 ARM has an interest rate that is usually lower than what 30-year fixed interest rate mortgages charge. This can help people qualify for a more expensive home.
Cons of a 2/28 ARM
While there are a lot of reasons why you might use a 2/28 ARM when you have less than perfect credit, these loans are not designed as a “best of the best” mortgage product. First, 2/28 ARMs have higher interest rates than some traditional and exotic mortgages after their initial introductory rate has expired. Second, if you don't refinance your mortgage after the first two years your interest rate can increase dramatically. This increase will also raise your monthly payments. Next, some 2/28 ARMs have pre-payment penalties that make refinancing your loan more expensive.
Get Some Help Finding a Lender
Now that you know the pros and cons of a 2/28 ARM you are in a great position to decide if this mortgage is right for you. If you want some help finding a lender that offers this type of loan then you need to go to QuoteMatch.com. They will set you up with quotes from lenders who have the products that you are looking for. Go to QuoteMatch.com today. |
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