Investments glossary

2/28 Adjustable-Rate Mortgage (2/28 ARM)

A 2/28 adjustable-rate mortgage (2/28 ARM) is a type of 30-year home loan that has an initial two-year fixed interest rate period. After this 2-year period, the rate floats based on an index plus a margin. The initial teaser rate is below average for conventional mortgages, but the adjustable rate can rise significantly. Since banks don’t make much money on the initial teaser rate, 2/28 ARMS include hefty pre-payment penalties during the first two years.

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