These mortgage programs offer a reduced rate (lower than the fixed rate programs) for a specified time (usually five years or seven years). The interest rate adjusts once after the initial period (the first step) to a rate that is fixed for the remaining term (the second step). The adjustment is automatically made on the date specified, and is usually limited by a cap (e.g. 5% over the initial rate). The index and margin used are generally tied to the FNMA (Fannie Mae) yield. The adjusted rate is approximately equal to (sometimes greater than) the interest rate on a zero point fixed rate mortgage at the time of adjustment.

BENEFITS:

This type of mortgage allows the borrower to qualify at a lower rate than fixed rate programs, but without the uncertainty of multiple rate adjustments. The one-time rate adjustment can be automatic and gives the borrower certainty for the remainder of the term. The borrower may have to requalify for the mortgage at the “second step” depending on the degree of change in rate. Please note that these mortgages can result in serious “payment shock,” at the time of the adjustment. The initial rate is typically lower than fixed rates, approximately the same as the 5/1 or 7/1. As with any loan that can have an interest rate change, be careful. The one time adjustment in the “two-step” mortgage program can very quickly offset the initial period’s savings.

This type of mortgage allows the borrower to qualify at a lower rate than fixed rate programs, but without the uncertainty of multiple rate adjustments. The one-time rate adjustment is contingent upon the following conditions:

•  The property is owner-occupied.

•  There are no second liens on the property.

•  The new rate is not greater than 5% above the initial rate.

•  There have been no late mortgage payments in the past twelve months. If any of these conditions have not been met at the time of adjustment, the remaining principle balance must be paid in full.