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Beatrix Reeves

Resumen biográfico Is a Two-Step Mortgage Loan a Good Choice?

As a home buyer, you can benefit greatly from the huge diversity of financing options available in the market. After the housing market downturn from 2008, the two-step mortgage loans fell out of favor with buyers, but now they are regaining their popularity. The question is whether such a loan will be suitable for you. Use this guide to make a well-informed decision.

What It Is

A two-step mortgage loan is a credit facility which consists of two periods or two steps. During the initial period, the borrower pays a fixed interest rate, which is typically very attractive. During the second period, the interest rate becomes adjustable. It can fluctuate up and down depending on the fluctuations of the index which it is tied to. Generally, it cannot go up or down uncontrollably. There are set minimum and maximum limits.

The two-step programs are typically for 30 years. The two periods are defined using a slash. Hence if the interest is fixed for 5 years, you will get a 5/25 loan. It is important to note that the fixed-interest period is typically shorter than 10 years. In most cases, it does not exceed 7 years.

Pros

The benefits of a two-step mortgage are:

Opportunity to save - If after the initial period the market interest rate is low, you can enjoy low interest on your loan as well and save considerably on its cost.

Easier to get - In general, these programs are easier to qualify for compared to the traditional fixed-rate programs. This is because the borrower assumes a greater chunk of the market risk which the native tribal installment loans lender has to bear. You can get such a loan with less than perfect credit score.

Opportunity for easier repayment - You will have fairly small installments during the initial period and this can help you save more for the next repayment period. If the adjustable interest rate remains low, you will get to pay smaller monthly installments. This will make the loan easier to repay.

Cons

The drawbacks of such a home loan are:

Possible higher cost - If the interest rate goes up during the second period and remains high for a fairly long time, you can pay much more for the financing than you initially planned.

Higher risk of payment shock and default - During the second period, there is a risk of the monthly installment becoming very high due to a very high interest rate. In this case, the risk of you defaulting on the loan becomes much higher.

Strategy

The reality is that the two-step mortgage loans can be quite beneficial for home buyers if they use them correctly. The best strategy is to take out such a loan in order to tap on the lower fixed interest and the lower monthly payments during the first period and then refinance it. The idea is to get refinancing at the same or a lower fixed interest. In order for this to work out, you need to have a very high credit score after the initial period. Preferably, it should be above 740.

Overall, you should take out a two-step mortgage loan if you have a foolproof strategy for using it.