10 Mar What’s a “2/28 Mortgage” and is it a Bad Thing?
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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