 Sam
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 Posted: Mon Apr 05, 2004 12:34 am Post subject: Two-Step Mortgage |
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Two-step mortgage is a kind of hybrid adjustable rate mortgage, that is, it has the features of both fixed rate and adjustable rate mortgages. These home loans initially offer a rate lower than the prevailing market rate for a fixed rate mortgage. After a specified period, the interest rate applied on the two-step mortgage changes to the current market rate and remains unaffected throughout the life of the loan.
For example: Andrew took an adjustable rate mortgage worth $400, 000 for 15 years. He was offered 4% interest rate for the first 5 years and then a 6% rate for the remaining 10 years of the loan period. Such a kind of home loan is a two-step mortgage.
Most common types of two-step mortgages are as follows:
- 5/25 two-step mortgage:
It offers an initial low rate for the first 5 years of the loan period after which, the rate adjusts itself for once only. This adjusted rate remains the same for the rest of the loan period, that is, the remaining 25 years.
- 7/23 two-step mortgage:
This kind of a loan offers a low initial rate for the first 7 years of the loan period, after which there is one rate adjustment. The adjusted rate stays the same for the remaining 23 years of the loan term.
A two-step mortgage allows you to:
- Get qualified for a low starting interest rate.
- Make low payments initially but at the same time, you can get protection against the interest rate changes.
- Pay a stable, predictable amount for the first 5 or 7 years and then, for the remaining 25 or 23 years after the rate adjustment.
- Get some time to sell your assets or refinance the home loan before the rate adjustment at the end of 5 or 7 years.
A two-step mortgage gives you the opportunity to buy a home even if you don't have a good credit profile. You can then re-establish good credit by making regular payments on the two-step mortgage. But if you fail to improve your credit profile, you would get stuck in a high rate loan for much longer than 2 or 3 years. Finally, this kind of home loan provides you with a convenient financing option when the market rates are high and you don't wish to lock in at a higher rate. |
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