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How to Get a Two-Step Mortgage

What it is

A two-step mortgage amortizes the loan over a certain number of years (typically 30), but at a lower rate than a standard 30-year mortgage. It is called a "two-step" because there are two periods, or steps, of this loan. In the initial step, the interest is fixed at a below-market rate. For a typical 30-year two-step loan, this initial step usually will last either 5 or 7 years. These mortgages are referred to as 5/25 or 7/23, respectively. In the second step, the interest rate is adjusted to the prevailing market rate for the balance of the loan for the remaining 25 or 23 years.

At the point where the loan switches from the first to the second step, the borrower usually has the option to choose either a fixed-rate or an adjustable rate mortgage for the remaining years. A fixed-rate mortgage would lock into the prevailing market interest rate at the time of the switch for the remainder of the loan. An adjustable-rate mortgage would have an interest rate that would change every month, in tune with the prevailing market interest rate.

Who it's for

A two-step mortgage is great for first-time homebuyers who are planning to stay in the home for at least the duration of the first period of the loan. The monthly payments during the initial step will be lower than normal. This will help homeowners buy up to their next home. This type of mortgage is also a good option for anyone during a period of high interest rates.

What you need to apply

For any type of mortgage, you will need to schedule a loan interview and have a copy of the signed purchase contract for the house. You will usually be required to complete a Uniform Residential Loan Application (URL-1003). Also, be prepared to pay an appraisal fee, application fee, and credit report fee.

Apply for a Two-Step Mortgage

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