2/28 Mortgages Explained


BenefitA 2/28 mortgage is a loan that is fixed for 2 years and adjustable for the final 28 years. This is a loan with a 30 year term.This type of loan is generally cheaper than loans that are fixed for a longer term, such as a 30 year fixed loan.2/28 mortgages have been used extensively in recent years during the real estate boom. It was often used with 100% financing.The prepayment penalty for many of these loans is typically for 2 years as well. This allows a borrower to refinance after the end of 2 years so they don’t have to pay a prepayment penalty. A prepayment penalty can often be 6 months of interest or something similar.DIfferent Loan Options To RefinanceA borrower who gets this loan will typically want to switch out of it when the interest rate adjustments. This happens at the end of the first 2 years. At that time, the interest rate will adjust per the terms of the loan. It can typically go up substantially. A monthly payment can increase by 50% or more.Many borrowers will have different loan options, including:
30 year fixed
40 year loan
50 year loan
10 year interest only
minimum payment option loan
How It WorksA borrower can use their additional buildup of equity to leverage into a lower mortgage rate.The process is similar to the last time the mortgage was done. Make sure that you use any additional equity built up into your property. Generally the more equity you have in your property the lower your interest rate should be.