Industry trade magazine Inside B&C Lending pegs the 2006 dollar volume of new sub-prime loans at $640 billion. According to the Real Estate Charts chart above, 78% of those dollars were in 2-year adjustable loans.
A loan of this variety is often called a 2/28 (“two twenty-eight”).
A 2/28 originated in 2006 will reach its first adjustment period sometime in 2008. Adjustments on sub-prime loans are typically 3% at the first adjustment, and 1.5% every six months thereafter until the “cap” of 7% above the original rate is reached.
Looking back to 2003-2006, a homeowner facing an upward adjustment in his mortgage rate could usually just replace the existing home loan with a new one, thereby avoiding the upward adjustment altogether. This is commonly called “refinancing” your home.
At present, though, this is a much more difficult proposition; there are considerably fewer mortgage products available for sub-prime borrowers to use.
With fewer available products into which to change, the homeowner with an adjusting mortgage may have no choice but to swallow the higher rate after the two-year fixed rate period ends.
If your home loan is among the 78% of 2/28s originated in 2006 — even if you have a pre-payment penalty — it may be time to call your loan officer just to check out your options.
Paying a little bit extra today on a new loan may be better than paying a lot on an adjusted mortgage tomorrow.