Log in / Register
Home arrow Business & Finance arrow The mortgage kit 6th edition
< Prev   CONTENTS   Next >

Two-Steps and Resets

Fannie Mae developed the Two-Step loan, while Freddie Mac developed the Reset. Both loans are really a type of adjustable-rate mortgage, but the rate adjusts only once in its 30-year term. For the first seven years (five years for the Freddie Mac Reset), called the initial period, the rate is fixed at the note rate that is quoted to you. At the end of the initial period, the rate is adjusted like every other ARM by adding a specified margin to an index. The new rate and monthly principal and interest payment then remain the same for the remaining 23 years or 25 years. At the end of the 30 years, the loan is fully amortized. These loans are sometimes referred to as a “7/23” or “5/25.”

The Two-Step and the Reset have the advantage of a lower initial rate like a balloon, but they do not require you to refinance at the end of the initial period as you would with a balloon loan. This makes the Two-Step and the Reset more desirable than a comparable balloon.

The Two-Step and Reset loans are appropriate for someone who wants a fixed-rate loan but is willing to trade a little bit of future uncertainty to get a lower and more affordable initial monthly payment.

3/1 ARMs

A 3/1 ARM is a one-year ARM with an initial adjustment interval of three years. For the first three years, the rate and monthly payment are fixed. At the end of three years and annually thereafter, the rate and payment are adjusted as they are for a one-year

ARM. There are also 5/1, 7/1, and 10/1 ARMs with initial adjustment periods of l ive, seven, and ten years, respectively.

When interest rates for fixed-rate loans are too high for you to qualify for your desired loan amount, and you want a loan that provides a level payment for at least the first few years, the 3/1, 5/1, or 7/1 ARMs could be right for you. Their initial rates are lower than a fixed-rate loan for easier qualifying, and their payments remain the same for a few years, giving you a fixed amount for which you can budget.

As with other ARMs, make sure that you have answered the questions “What will my payments be if rates stay where they are today?” and “What is the maximum monthly payment amount?”

Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
Business & Finance
Computer Science
Language & Literature
Political science