My mortgage broker recently suggested that I consider what he calls a 2/28 adjustable rate mortgage. He says that with this program I can lock in a lower interest rate while I rebuild my credit and then apply for a FHA loan in about two years. Please tell me more about this program and if it is worth considering. I would like to know the pros and cons.

Thank you in advance,

A. W.
Jonesboro
Georgia

Answer:

A 2/28 mortgage is okay - try to make sure your pre-payment penalty is not more than 2 years - otherwise when you rebuild your credit and refinance for a FHA mortgage in 2 years you will owe 6 mos of pre-paid interest to the top of your existing mortgage balance. A better program would be a 3/27: the rate is better it will allow you more time to fix your credit and ask the officer to give you a 2 year prepay which will have expired after 2 years and you can refinance without a penalty.

Finally, how bad do you need to refinance? Can you wait 12 months - paying everything on time and do a FHA Loan for a lower rate. FHA requires 12 months of on time payments no lates no recent charge offs, and all paid collections must be paid up front. If you can wait - The FHA is worth it. If not go with the Subprime and re-build with no prepay or a short pre-pay.

Hope this info helped.

Ora