2/28 ARM

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What is a 2/28 ARM?

A 2/28 Adjustable Rate Mortgage (ARM) is a type of mortgage loan where the interest rate is fixed for the first two years (24 months), and then adjusts annually thereafter according to a specific benchmark or index. This mortgage structure is usually represented as 2/28, where the “2” signifies the initial fixed-rate period, and the “28” indicates the remaining adjustable period in years.

Structure of a 2/28 ARM

  • Initial Fixed-Rate Period: The loan begins with a fixed interest rate that remains constant for 2 years.
  • Adjustable-Rate Period: After the initial 2 years, the interest rate adjusts annually for the remaining 28 years of the loan term.

Benefits of a 2/28 ARM

  1. Lower Initial Rates: The initial fixed-rate is often lower than the rates available for fixed-rate mortgages, making it attractive for short-term homeowners.
  2. Potential for Falling Rates: If interest rates fall, your rate and payments could decrease during the adjustable period.
  3. Initial Stability: The fixed-rate for the first two years provides some level of predictability for short-term planning.

Risks and Drawbacks

  1. Rate Uncertainty: After the fixed period, your rates could increase significantly, making your mortgage payments much higher.
  2. Prepayment Penalties: Some 2/28 ARMs come with prepayment penalties, restricting your ability to refinance.
  3. Complexity: The terms and conditions, including how the rate adjusts, caps, and floors, can be complex to understand.

Factors Affecting Rate Adjustment

  • Benchmark or Index: Commonly tied to indices like LIBOR or the Prime Rate.
  • Margin: A fixed percentage added to the benchmark rate to determine your new rate.
  • Caps: Limitations on how much the interest rate can increase or decrease during each adjustment period and over the life of the loan.

Is a 2/28 ARM Right for You?

  1. Short-term Ownership: If you plan to sell the home within 2 years, the lower initial rate could save you money.
  2. Financial Flexibility: If you expect a significant increase in income or falling interest rates, a 2/28 ARM might be suitable.
  3. Risk Tolerance: Be sure you are comfortable with the potential for rising interest rates and payments.
While a 2/28 ARM can offer initial savings and the potential for lower payments if interest rates fall, it carries significant risks, including rising interest rates and larger mortgage payments. Thoroughly examine your financial situation and consult with financial advisors to determine if this mortgage structure is appropriate for you.


A 2/28 ARM is a mortgage with a fixed interest rate for the first two years, after which the rate adjusts annually based on market conditions and an index.

After the initial two-year period, the adjustable rate is typically determined by adding a margin to an index like the LIBOR or the Secured Overnight Financing Rate (SOFR).

The primary risk is that interest rates could increase significantly after the initial fixed period, leading to higher monthly payments.

Yes, you can typically refinance out of a 2/28 ARM before the adjustable rate period begins, subject to qualification and any prepayment penalties.

The main benefit is a lower initial interest rate compared to a fixed-rate mortgage, which can result in lower initial monthly payments.

Consider your future income stability, the likelihood of interest rates rising, and your ability to handle potentially higher future payments.

The adjustment cap limits how much the interest rate can increase or decrease at each adjustment period. There may be an initial adjustment cap, subsequent adjustment cap, and a lifetime cap.

Yes, if you plan to sell or refinance before the adjustable period begins, a 2/28 ARM could be a good option to take advantage of lower initial rates.

If you can’t afford the new payment, you could risk defaulting on the loan. It’s crucial to communicate with your lender as they might be able to offer solutions like loan modification.

Economic conditions influence interest rates. During periods of rising interest rates, a 2/28 ARM becomes riskier as the adjustable rate is likely to increase. In a low-interest-rate environment, the risks are reduced.

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