Two Step Mortgage Law and Legal Definition
Two step mortgages are those mortgages where there will be two rates of interest. These types of mortgages offer a fixed interest rate for a period of time in the first phase. The first phase will be usually for a period of five to seven years, and after this period the interest rate adjusts according to the current market rate which will be followed for the remaining term of the mortgage. There are much risks involved in carrying two step mortgage for the reason that there is a chance of the rates being higher at the second phase.
Two step mortgage can only be preferred in the right conditions. The conditions in which the two step mortgage is proffered are:
1. When interest rates are high at the beginning of the loan but are expected to drop;
2. When there is a strong likelihood a borrower will not be in the home longer than five to seven years; and
3. When the borrower cannot afford higher payments initially, but has a reasonable assurance of being able to afford such payments in the future.
Although subject to market condition one main advantage attached to two step mortgage is the possibility of large amount of savings if the market stays relatively good.