Finance Articles

What Is A Two-Step Mortgage?

When it comes to the various options that you can get for buying your house, a two-step mortgage may be just the thing you need. Being that it is kind of a cross between both a fixed rate mortgage and an adjustable rate, it may provide just the option you want in a time of financial uncertainty. Here are some things you need to know about second step mortgages.

A two-step mortgage, like its name implies has two different parts to it. Often called a hybrid loan, it combines some of the features of both types into a typical 30-year mortgage. The first part of the mortgage, which is usually either 5 or 7 years, has a fixed rate so that the interest and payment stay the same. This part of the loan is typically lower than the market value giving the buyer some savings during this time.

At the end of the first period, an adjustment will take place, which will determine what the payments will be for the remainder of the 30 years. Since a two-step mortgage is typically more of an adjustable rate mortgage, at least at this time, the adjustable rates will now kick in. Generally, and this is something you want to make sure is in the terms, there is a limit placed on how much of a percentage the interest can be raised - if the market calls for a raise. After this initial raise, the interest rate is adjusted yearly - according to the market.

This type of mortgage is good for someone who may be thinking of moving prior to the time that the mortgage rates are changed. If they are not certain that they will stay at that location then this would be a good way to go. Another possibility is that a two-step mortgage would allow someone with a lower income to get a larger house. This could work quite well especially if they are quite sure that their income will be improved over the next few years.

The main advantage of this type of mortgage, as with any adjustable rate mortgage, is the possibility of a large amount of savings if the market stays relatively good. Of course, this is really unpredictable, but it could serve as a good way to go. On the other hand, you may be forced to sell if the market does turn bad.

When you look for a mortgage, whether it be a two-step mortgage or any other kind, be sure to compare it with several offers. This way, you can see what others are offering and have something to compare your offer with. Be sure to separate the interest and principal from the various fees that will be applied. You want to compare the fees with the fees on other offers especially, because this is where any extras that there are will be added. It is a good idea to know the terms that apply to the various fees - some are really unnecessary, but you need to be able to tell the difference.

Joe Kenny writes for the UK personal finance sites http://www.ukpersonalloanstore.co.uk and also http://www.cardguide.co.uk

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