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  Dear
Dr. Don,
Here are the particulars on a first and second
mortgage loan program
offered to me:
1st trust: $1,475.00 -- This is an interest-only 2/28
LIBOR ARM with a two-year PPP.
2nd trust: $533.63 -- This is a fixed rate 30/15 balloon.
What should I understand from that?
-- Dragos Details
 Dear
Dragos,
The first mortgage has a fixed rate for the first
two years. After that the mortgage interest rate and the payment
will adjust every reset period as an adjustable-rate mortgage. If
the fixed rate is a teaser rate, the fully indexed rate could mean
a big increase in your monthly mortgage payment.
The loan is priced off the London Interbank Offer
Rate, but you haven't specified which LIBOR rate. Bankrate tracks
four different LIBOR rates, the one-month, three-month, six-month
and one-year. You can follow these rates using Bankrate's
Rate Watch page.
The PPP refers to a prepayment penalty. If you refinance
the mortgage in the first two years, you will pay a penalty.
The second mortgage has payments based on a 30-year
amortization, but comes due in 15 years, with a balloon payment.
You can use the amortization schedule on Bankrate's mortgage
calculator to determine the remaining principal balance after
15 years to determine the balloon payment.
Often a 2/28 structure is offered to someone with
poor credit to qualify them for a mortgage on a home they couldn't
otherwise afford. While it does give the homeowner two years to
rebuild their credit, and thereby qualify for a better loan, you
don't know where interest rates will be two years from now, and
paying two sets of closing costs in two years makes that strategy
prohibitively expensive.
Taking out a first mortgage and a second mortgage
at the same time can allow you to avoid paying private mortgage
insurance on the first mortgage. First mortgages typically require
private mortgage insurance when the loan-to-value of the first mortgage
is over 80 percent.
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