Hybrid ARM (adjustable-rate mortgages)

[JDGutzmann]

Hello,
I couldn't find a comprehensive thread on this topic yet so I am simply starting a new one.
At the moment there is only one thing unclear to me:
What do the fractions "2/28" and "3/27" stand for?
Thanks in advance,
Johannes

 

[brian.field]

A 2/28 is fixed for 2 years and adjustable for 28 years and a 3/27 is fixed for 3 years and floating (adjustable) for 27 years. Both inherently assume a 30 year amortization.

 

[JDGutzmann]

Oh, that was easy. Guess I should've thought of it myself. Thank you!

 

[Bionic Turtle Super Admin]

And when the reset to adjustable occurs (e.g., at 2 years in 2/28, at 3 years in 3/27), the loan is re-amortized per the remaining balance and term. I noticed that P1.T3. Fabozzi on MBS has been dropped in favor of a return to Tuckman, who does not spell it out like Fabozzi does below (emphasis mine):

"For amortizing ARM loans, the initial payment is calculated at the initial note rate for the full 360-month term. At the first reset, and at every subsequent adjustment, the loan is recast, and the monthly payment schedule is recalculated using the new note rate and the remaining term of the loan. For example, payments on a five-year hybrid ARM with a 5.5% note rate would initially be calculated as a 5.5% loan with a 360-month term. If the loan resets to a 6.5% rate after five years (based on both the underlying index and the loan’s margin), the payment is calculated using a 6.5% note rate, the remaining balance in month 60, and a 300-month term. In the following year, the payment would be recalculated again using the remaining balance and prevailing rate (depending on the performance of the index referenced by the loan) and a 288-month term. In this case, the loan’s initial monthly payment would be $568; in month 60, the loan’s payment would change to $624, or the payment at a 6.5% rate for 300 months on a $92,460 remaining balance." - Fabozzi, Frank J.; Bhattacharya, Anand K.; Berliner, William S. (2009-10-19). Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques (Frank J. Fabozzi Series) (Kindle Locations 425-432). Wiley. Kindle Edition.

 

[brian.field]

Thanks for that clarification - it is good to know!