What is a Two-Step Mortgage?

When you’re looking around for mortgages, it definitely helps to have an idea of all of your options. If you think that your only option is a fixed rate mortgage, you might want to think about. Now, a lot of people are fans of fixed-rate mortgages, and that’s great. However, we like to look at other types of mortgages as well. Will every real estate broker offer these mortgages? Not always. Will you have them without mortgage points? Not always.

One mortgage type that a lot of people are interested in is definitely the adjustable rate mortgage. However, they would like a little bit more stability than what they’re getting. Does this mean that it’s the end of the world and you aren’t going to be able to find the best of both worlds? Not true at all!

Welcome to the two-step mortgage. These are mortgages that literally combine the features of the fixed-rate mortgage with the features of the adjustable rate mortgage. As you know, it’s easier to get into an adjustable rate mortgage because you don’t have to put as much money down. This gives cash-strapped couples a chance to be homeowners without having to have a large nest egg built up. On the other hand, the other half of the two-step mortgage gives them a chance at having a loan that will remain fixed for a certain period of time.

Now, most of the time it’s the other way around — you get the fixed rate portion up front, and then the mortgage resets. Given these parameters, you might wonder when it’s a good time to look at a two-step mortgage. The best time to really think about a two-step mortgage is when you know that you’re going to be able to refinance later. That way you can get the original mortgage paid off and then go with a more traditional mortgage. The other time is when you know that you will want to move in five to seen years. Having a mortgage that has fixed payments for the times where you’re going to live there is definitely a good thing. Generally speaking, you’ll get a nice low interest rate at the start, which turns into low monthly payments. From a budget standpoint, this gives you a lot of free cash flow that you wouldn’t have if you had simply gone with a traditional mortgage with a higher interest rate.

Keep in mind that you are still going to have to prepare for getting a two-step mortgage like you would with any other mortgage. For example, you still need to make sure that your credit report is as clean as possible — you don’t want to end up with mistakes and errors on your credit report– this can really cost you in the long run. Give yourself plenty of time to correct your credit report before you actually think about applying for a mortgage — especially the two-step mortgage. Coming in prepared means a higher chance of actually making a good mortgage deal — which is exactly what you’re looking for in the first place!