Q

What’s a two-step mortgage?

A

It's a specific type of 30-year adjustable rate mortgage that begins with a low introductory interest rate after which it adjusts to a rate that’s tied to the current interest rates.

Two-step mortgages typically offer either a 5 or 7-year introductory rate, and are commonly referred to as 5/25s or 7/23s. Most two-step loans lock on a rate for the remainder of the mortgage amortization period; some might adjust annually.

Since you can be reasonably certain that the introductory rate will be lower than the subsequent market-tied rate, they’re ideal for a few different scenarios. If you plan to stay in the house for a period of no more than 5 or 7 years, after which the payments would rise considerably, it may be ideal (though in a situation like this, you might seriously consider renting to be a better financial decision). If interest rates happen to be abnormally high when you’re mortgage shopping and all signs point to a future reduction, a two-step might also be worth considering.

Those who decide to stay in homes longer than 5-7 years are prime candidates for refinancing once the introductory period ends. So if the idea of going another uncomfortably deep dive into your financial history it required to get your first mortgage turns your stomach, you might want to stick to the tried and true 30-year fixed rate.

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