Types of Home Mortgages: Two Steps & Resets

An Overview

If you are looking for a mortgage with a fixed rate but want the low payments of the early periods of the ARM loan, the hybrid home loan may be what you’re looking for. This loan combines features of the two purebred loans, and the two step loan is one such combination. This loan is self-descriptive—it is a mortgage that will experience one rate adjustment over its lifetime, after a period of five or seven years.

When is the Two Step Home Loan a Positive Course for a Borrower

The two step is good for borrowers who do not want to be locked into high interest rates for the entire loan, as they would be with the 30-year fixed mortgage. Although they could refinance at some point, the hybrid loan may be easier to deal with in their particular situation—perhaps they need smaller monthly payments in the beginning, as in the ARM. Because the rate changes to the current market rate with its second step, however, the buyer will not know exactly what the new payments will be.

Other Advantages of the Two Step Home Loan

The two step mortgage has some other advantages. The buyer who doesn’t want high initial rates but still wants a fixed rate for five to seven years might prefer the two step plan. This mortgage is not subject to interest rate changes for the initial period of the loan. This gives the buyer time to save money and take advantage of increased earnings over the initial period.

Disadvantages of the Two Step Home Loan

Disadvantages to the two step are in the rate hikes—there is a change rates will go much higher over that initial period, and the buyer could be saddled with that high payment on the entire final 23 to 25 years of the loan.

Understanding the Reset Home Loan

A reset loan is a balloon loan that gives the buyer the option to reset the rate of interest to the going rates if she chooses to stay in the home at the end of the initial period. Buyers usually have this option only if they are still occupying the house and have made payments on time. This type of balloon mortgage sometimes comes with a lower beginning interest rate—lenders know they have the option of refusing the reset based on a borrower’s risk, or to keep a good customer who makes payments on time without a lot of refinancing paperwork.

Other Advantages of the Reset Home Loan

The additional advantage of the balloon reset mortgage is that buyers can qualify for a larger loan than they would have without it. The disadvantage to this is that if they experience a glitch in their credit during the initial payment periods, or have a late house payment, they may not get the reset option and may lose the ability to refinance as well. This option should be reserved for the confident buyer with a stable job who is certain of future increases in income.