Mixed news from the sub-prime sector, depending on how you look at it. Many lenders discontinuing their short-term ARM products.
The “2/28” is a adjustable rate mortgage in which the interest rate remains fixed for two years, and then adjusts for the loan’s remaining 28 years.
The 2/28 mortgage was the basis of all sub-prime lending in recent years.
First Franklin has gone a step further, eliminating the 2/28 and the 3/27. As you’d expect, the 3/27 is a mortgage in which the interest rate remains fixed for three years, and then adjusts for the loan’s remaining 27 years.
Lenders are continuing to offer 5/25 mortgages and 30-year fixed mortgages.
The mortgage lenders hope that longer “fixed rate periods” on their mortgage products will help keep their loans from defaulting so soon.
Today, 2/28s originated in 2003 and 2004 are in their adjustment phase and are contributing to rising foreclosure rates across the country.
For homeowners, the downside to loan portfolio paring is that longer fixed-rate periods creates more “time risk” for the lending bank and, therefore, leads to higher interest rates for home loans.
The potential upside, though, is that better sub-prime loan performance overall will reduce the risk levels in sub-prime, thereby lowering mortgage rates. Either way, borrowing money classified as “sub-prime” continues to get more difficult.
If you believe you are a sub-prime borrower, speak with your mortgage lender and/or financial planner and craft a plan to improve your credit rating and lending risk profile.