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What are Two-Step Mortgages?

These are 30-year mortgages that come in two different types: convertible and nonconvertible. These loans are also known as 5/25s and 7/23s. The 5/25s has a fixed interest rate for the first five years and then coverts to either a 25 year fixed or a 1 year adjustable. The 7/23 has a fixed interest rate for the first seven years and then converts to a 23 year fixed or a 1 year adjustable. The initial interest rate is lower than a 30-year fixed, however, this is higher than a 1-year adjustable. Also, there is less risk involved than with an ARM initially as the adjustment interval is longer.

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June, 2012

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