What’s a “2/28 Mortgage” and is it a Bad Thing?
By Brett Weiss, Maryland Bankruptcy Attorney on Mar 10, 2007 in Benefits of Bankruptcy, Chapter 13 Bankruptcy, General Bankruptcy Information, Maryland
There have many stories in the media recently about something called a “2/28 Mortgage,” and the problems they are causing for many people.
A 2/28 Mortgage is an adjustable rate mortgage loan where interest is paid for two years at a relatively low rate, and then the interest rate “floats,” or changes, upwards. Most of the 2/28 mortgages here in Maryland determine the float interest by using the six-month London Interbank Offered Rate, or LIBOR, PLUS 6.5 points. Since today’s LIBOR is 5.3%, once the initial two year “teaser” rate is up, your interest rate would increase to 11.8%.
There usually are limits on the amount that the rate can increase of 3% for the first adjustment and 1% each additional adjustment. While this softens the blow, it’s still a pretty hard punch: for someone with a $250,000 mortgage and a 5.5% initial rate, their payment would increase by $502.81 at the initial adjustment, and by $179.86 every six months for the next year and a half, ending up increasing a total of $1,113.64.
Needless to say, most folks can’t pay an additional $1,100 per month for their mortgage payment, and many people who took out 2/28 mortgages are forced into refinances or may even lose their homes or need to file for bankruptcy relief. A recent study by First American Real Estate Solutions, a unit of title insurer First American Corp., projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.
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