Once the potential property owners are keen and all set on purchasing their dream home through financing, they may need to decide on the best loan possible. And several kinds of loans are available with unique features, considerations, characteristics, and benefits. One of the loans that might not be that popular but can be given consideration is the two step mortgage.
This type of loan is commonly viable for newly constructed properties. The preliminary phase includes construction, which converts to an adjustable rate. Creditors are often enticed with the two-step loan since it provides an option for those who qualify for traditional mortgages.
To gain a deeper understanding of the two step mortgage, continue reading below.
A two step mortgage is a home mortgage that provides two (2) varied interest rates. It lets the potential borrower have a lesser interest rate for a specific duration, generally between five (5) and seven (7) years; this is the initial phase or the first step. Once the initial phase finishes and the construction is complete, the adjustment phase, which is the second step, will take effect, which means the interest rate will convert to show the interest rates. This kind of mortgage might be the best choice for homebuyers who foresee an adjustment or increase in their earnings over time or who have plans of refinancing their homes before the start of more considerable interest rates.
Two (2) varied kinds of two step mortgages are associated with the 30-year term: convertible, also called the 5/25s, and nonconvertible, also called 7/23s.
The Convertible Two Step: The 5/25s
The first is the convertible two-step loan with an initial fixed interest rate of five (5) years. After that, the interest rate will adjust once for the outstanding 25 years of the mortgage. Homebuyers can choose this mortgage when planning to reside in the property for five years and consider the possibility of extending their stay.
However, considering the ambiguity on the amount of your payment once it adjusts after five years, the homebuyer must take this kind of mortgage if they are sure about managing the payment for the converted monthly costs in their loan.
The Nonconvertible: The 7/23s
The second kind is nonconvertible, also called the 7/23s, which has a fixed interest rate of seven (7) years, after which the interest rate will adjust once for the outstanding 23 years of the mortgage. Homebuyers can choose this mortgage when planning to reside in the property for seven (7) years and consider the possibility of extending their stay.
With the two step loan, potential borrowers can take advantage of the initial rates, which are less than the rates in the financial market for the 30 years term, and have a one-time conversion which offers a reduced risk to the homebuyers over the mortgage. Homebuyers will have sole interest rate for the mortgage terms on the first five (5) or seven (7) years. After the five (5) or seven (7) years end, the homeowners' mortgage interest rates will adjust for the remaining mortgage period.
Confident homebuyers prefer the two step mortgage due to the usual initial low short-term rate. But the adjustment, which is the second step, might slightly increase if compared to the famous 30 years conforming fixed rate mortgage. It depends on how many years the homeowners plan to possess the property and meet the lesser-rate requirements.
There are certain conditions when the two-step mortgage is an excellent choice for homebuyers.
Homebuyers considering this kind of mortgage can take benefits in the following:
The initial low-interest rates.
With the two step home loan, homebuyers can enjoy the close in low-interest rate for a specific duration of five (5) and seven (7) years.
Protection from Increasing Interest Rates.
One of the great benefits of this mortgage is that it protects from increasing interest rates for the primary stage of the mortgage, which means affordability in the monthly payment for homebuyers regardless of the escalation in the interest rates.
When the initial period ends, the interest rates adjust one time according to the market conditions.
Here are some of the considerations worth paying attention to when the potential borrower is considering acquiring two step loans:
Ensure to manage the monthly payments.
Before deciding if homebuyers will obtain this kind of mortgage, ensure that they can manage to pay off the monthly payment even if there is an increase in the interest rates.
Understand how two step loans work.
The two step loan might be complicated. Homebuyers must understand how it works before signing any contract or agreement.
Ensure to know when the interest rates will adjust.
Homebuyers must ensure when the interest rate will adjust and how much it will change. As such, these details will significantly help homebuyers effectively plan for their finances.
The two-step mortgage features a lower fixed rate for a particular time. After that, the interest rates will adjust annually for the outstanding duration of the mortgage but will certainly stay within the maximum amount or the specified threshold value. This type of mortgage might be best for homebuyers planning to reside in their home for a few years or if they expect the interest rates to increase later.
Suppose you are considering this and deciding to obtain the two step mortgage. In that case, we strongly advise you to seek the advice of a reputable company in exploring the best mortgage options that will best suit your needs.