Fixed interest rates

But what rate are you getting for this loan?

The payments on this will be only interest only payments for the 1st 5 years within which you are planning to refinance to get better terms.

Instead of a 2/28 arm you can also look for a 5/1 arm with IO option where the rate will be fixed for the first 5 yrs. and then start to adjust.

I am thinking of building my equity and refinancing in the 5 year itself with a lower rate. But I want to know more about the type of loan offered to me and if it can really help me build equity? What are the pros and cons?

If you make interest only payments then equity will not be built. The reason is that in other type of mortgages your monthly mortgage payments include interest as well as principal payments. So as you continue making the payments principal loan amount also decreases with time and you build up equity in your home. In I-O payments, principal remains the same as you only make the interest payments and thus there is no reduction in the original mortgage principal.

In one situation equity will develop even with I-O payments if the house appreciates in value but it may also happen that market value of your house goes down!

 

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A 2/28 fixed/ARM is an option which offers you a fixed rate of interest for the first 2 years and includes a 2year pre-payment penalty. This kind of loan is often offered to those who have credit problems.

The interest-only option allows you to pay only interest for 5 years but then it does not help you to build much equity (difference between the appraised home value and the principal balance). This is because, if you do not pay principal for the first 5 years, you cannot reduce the principal balance and hence less equity. Also, your equity will grow if there is an increase in your appraised value which is to some extent dependent on the home sale value in the neighborhood.

However, at the end of the 2 year period, the loan will be converted into an ARM which adjusts after every 6 months. You need to get information on the index of the ARM, the margin and the rate cap. This will help you to decide whether you should go for this option based on the calculated monthly payments.

Hope this helps...

You need to keep looking at lenders. From what you described, the loan officer you are working with is only considering sub-prime loan programs for you. There are other options despite your bankruptcy.

Many 2 year fixed rate loans (2/28 with 5 year interest-only periods) are written with 5 year pre-payment periods, not 2 years. That means you could be financially stuck in a loan with increasing interest rates.