Homebuyers face may choices in types of mortgages, from longer-term fixed rate loans to shorter-term adjustable-rate loans. A 2/28 adjustable-rate mortgage is one type of adjustable rate mortgage that is less common than the traditional 30-year fixed mortgage, but it may suit some buyers' needs.

A 2/28 mortgage essentially offers a two-year fixed interest rate followed by a floating rate for 28 years. Learn how this type of༺ mortgage works, and mo🎀re about the pros and cons.

What Is🐷 a 2/28 Adjustable-Rate Mortgage (2/28 ARM)?

A 2/28 澳洲幸运5官方开奖结果体彩网:adjustable-rate mortgage (2/28 ARM) is a type of 30-year home loan that has an initial two-year fixed interest rate period. After this two-year period, the rate floats based on an index rate plus a margin.

The initial teaser rate is typically below the average rate of conventional mortgages, but the adjustable rate can then rise significantly. Since banks don’t make much money on the initial teaser rate, 2/28 ARMs include hefty 澳洲幸运5官方开奖结果体彩网:prepayment penalties during the first two years.

Understanding 2/28 A🦂djustable-Rate Mortgages (2/28 ARMs)

The 2/28 ARMs became popular during the real estate boom of the early 2000s, when soaring prices put 澳洲幸运5官方开奖结果体彩网:conventional mortgage payments out of reach for many buyers.

Other ARM structures exist, such as 5/1, 5/5, and 5/6 ARMs, which feature a five-year introductory period followed by a rate adj๊ustment every five years or every six months, respectively. Notably, 15/15 ARMs adjust once after 15 years and then remain fixed for the remainder of the loan.

Less common are the 2/28 and 澳洲幸运5官方开奖结果体彩网:3/27 ARMs. With the former, the fixed interest rate applies for only the first two years, followed by 28 years of adjustable rates. With the latter, the fixed rate is for three years, with adjustments in each of the following 27 years. In these cases, rates adjust semiannually.

Example of 2/28 ARM

For example, let's say you are buying a $350,000 home and providing a down payment of $50,000. You have a $300,000 2/28 ARM mortgage with an initial interest rate of 5% and monthly payments of $1,906. (Total monthly mortgage payments vary when property taxes and insurance costs are factored in. This example assumes $230 per month in property tax and $66 per month in insurance costs.)

With a 2/28 ARM, your interest rate of 5% remains fixed for two years. Then, it can change based on changes in a 澳洲幸运5官方开奖结果体彩网:broader index rate. Let's say your interest rate then rises to 5.3%. Your total monthly costs wou🐎ld rise to $1,961. Your interest rate would continue to change over the remainder of the loan depending on the broader index. So, the total costs of the loan would be difficult to estimate.

In comparison, if you had a 30-fixed mortgage on the same loan with 5% interest, you would pay $1,906 per month and you can expect to pay♋ $279,987 in total interest if you did not pay ℱthe loan off early.

Risks of 2/28 ARMs

The risk with an adjustable-rate mortgages like an 2/28 ARM is the potential for the rate to increase. After two years, the rate is adjusted every six months, typically upward, by a margin above an index rate, such as the 澳洲幸运5官方开奖结果体彩网:federal funds rate or the 澳洲幸运5官方开奖结果体彩网:Secu🅠red Overnight Financing Rate (♊SOFR). 2/28 ARMs have some built-in safety features, such as a 澳洲幸运5官方开奖结果体彩网:lifetime interest rate cap and limits on how much the rate can change with each period. But even with caps, homeowners can face significant payment spikes in volatile markets.

During the boom, many homeowners failed to understand how a seemingly small rate increase could dramatically boost their monthly payment. And even many of those who were fully aware of the risks viewed 2/28 ARMs as a short-term financing vehicle. The idea was to take advantage of the low teaser rate, then 澳洲幸运5官方开奖结果体彩网:refinance after two years to either a conventional mortgage. Or, if their credit was not good enough, they would refinance to a new adjustable mortgage. Amid spiking real estate prices, this strategy kicked the debt further down the road. To many, this made a certain amount of sense since, after all, the borrower’s 澳洲幸运5官方开奖结果体彩网:home equity was rising fast.

But with the 澳洲幸运5官方开奖结果体彩网:market collapse in 2008, home values plummeted. Many owners with 2/28 ARMs found were unable to refinance, make their payments, or sell their homes for the value of the outstanding loan. The rash of 澳洲幸运5官方开奖结果体彩网:foreclosures led to stricter loan standards. Today, banks more carefully evaluate a borrower’s ability to mak🍷e adjus🧸table-rate payments.

2/28 ARM vs. Fixed Rate Mortgage

Adjustable-rate mortgages like a 2/28 ARM work differently than fixed-rate💯 mortgages and this difference is important to understand for planning your long-ter✅m finances.

An adjustable rate mortgage will have an interest rate that can change. That means your monthly payments can change and the overall total inter🌠est you will pay is unpredictable. Because the interest can change, you will need to prepare for the possibility that you will have to make higher monthly payments.

In contrast, interest on a fixed-rate mortgage does not change. You can plan for the same monthly payment for the life of the loan. A 2/28 ARM offers the fixed rate for only the 𒀰first two years, after which the rate can adjust.

Is a 2/28 Adjustable-Rate Mဣortgage Right for You?

A 2/28 adjustable-rate mortgage has advantages and disadvantages that make it ideal for some buyers but not for others. Weigh the pros and cons with your own financial situat♍ion to🉐 determine if this type of mortgage is right for you.

You may benefit from a 2/28 ARM if you need ⛎a lower monthly payment at the beginning of your mortgage 🍌and if you believe you will be able to make higher monthly payments in the future. However if you can afford a higher monthly payment, you may save more money in total interest costs with other loan options, such as a 15-year fixed-rate loan.

The Bottom Line

A 2/28 adjustable-rate mortgage (ARM) is a variable-rate home l🥂oan that has a set rate for the 💎first two years and then a floating rate for the next 28 years. It is an alternative to a 30-year fixed mortgage that, while less common, can be more suitable for certain buyers. Like any mortgage, it has advantages and disadvantages.