A 2/28 Adjustable-Rate Mortgage (2/28 ARM) is a type of mortgage loan with an initial fixed-rate period followed by an adjustable-rate period. This structure allows borrowers to enjoy a fixed interest rate for the first two years of the loan term, after which the interest rate becomes adjustable for the remaining 28 years.

Here’s how a 2/28 ARM typically works:

1. **Initial Fixed Period (2 Years):**
– During the initial two-year period, the borrower benefits from a fixed interest rate. This fixed rate is usually lower than what might be offered for a traditional 30-year fixed-rate mortgage. It provides borrowers with stability and predictable monthly payments during the initial stage of homeownership.

2. **Adjustable Period (Remaining 28 Years):**
– After the initial fixed period of two years, the interest rate on the mortgage becomes adjustable. The rate is typically tied to a specific financial index, such as the U.S. Treasury Bill rate or the London Interbank Offered Rate (LIBOR). The interest rate may adjust annually or at specified intervals based on the terms outlined in the mortgage agreement.

3. **Adjustment Caps and Limits:**
– 2/28 ARMs often have adjustment caps to limit how much the interest rate can change during each adjustment period and over the life of the loan. For example, there might be annual caps (limiting the change from one year to the next) and lifetime caps (limiting the total change over the loan’s term).

4. **Risk Considerations:**
– Borrowers should be aware that, after the initial fixed period, their monthly payments may increase or decrease based on changes in interest rates. The adjustable nature of the mortgage introduces an element of risk, and borrowers should carefully evaluate their financial situation and ability to handle potential increases in payments.

5. **Prepayment Penalties:**
– Some 2/28 ARMs may have prepayment penalties, which are fees charged if the borrower pays off the mortgage or refinances during a specified period. Borrowers should review the terms of the loan agreement to understand any potential penalties.

6. **Consideration of Future Plans:**
– Borrowers considering a 2/28 ARM should assess their future plans, such as whether they plan to sell the property or refinance before the adjustable period begins. Understanding the potential impact of rate adjustments on monthly payments is crucial for effective financial planning.

2/28 ARMs were more common in the years leading up to the housing market crisis in 2008. They played a role in some of the challenges faced by borrowers when interest rates increased after the initial fixed-rate period. As a result, regulatory changes and increased scrutiny have influenced lending practices related to adjustable-rate mortgages in recent years. It’s important for borrowers to fully understand the terms of the loan and seek professional advice when considering such mortgage products.