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These loans are structured so that the first two (2/28) or three (3/27) years are Fixed at the Start Rate. The remaining term (28-27 years) converts to a One Year Adjustable Rate Mortgage (1 Year ARM) or sometimes a 6 Month ARM after the fixed rate period is over. At least this loan is “fully amortizing” and normally written for 30 years, without any “balloon” provisions.
If you are planning to keep your new property or this loan for the short term, one of these loans might be an excellent choice. The start rate should be less than a comparable 30 Year Fixed Rate mortgage and will not adjust (increase) for the first two to three years. You must be careful, however, when you analyze your choices with this loan. First, examine how the loan changes after the fixed rate period. Does it become a one year adjustable rate mortgage (1 Year ARM) or a six month ARM? Regardless of the new terms, examine the Index, Margin, Adjustment and Lifetime Rate Caps for the loan being considered to decide if this loan is for you. Except in sub-prime borrowing situations, the start rate will be lower than the market rate for fixed rate loans.
This mortgage loan type can be a very useful tool but the terms after the fixed rate period should be analyzed properly. Examine the Index, Margin, Adjustment and Lifetime Rate Caps carefully so you don't get unpleasantly surprised at interest rate adjustment time. If the start rate is sufficiently below the current fixed rate and the ARM terms are reasonable, one of these mortgage loans could be a good choice for you.