Step Rate Mortgage Provides Initial Fixed Rate

By Karen Lawson
CMR Columnist

If you're concerned about current interest rates, and payments on your adjustable rate mortgage are going up, refinancing to a step rate mortgage can help stabilize your payments, while offering an initial fixed interest rate. Step rate mortgages can be a great way to eliminate features such as negative amortization, interest only payments, and unpredictable rate adjustments.

Mortgage Terms Can be Confusing. How Does a Step Rate Mortgage Work?

At last, a mortgage that is easy to understand! Basically, a step rate mortgage begins with an initial period, usually the first five to seven years, at a lower than market interest rate. After the initial period, your rate may adjust to the then current fixed rate, or to an adjustable rate mortgage (ARM). It's important to compare your current rate with the rates offered for step rate mortgages. You can ask your lender to provide comparisons in order to get an idea of what your payments will be and how much you can save by refinancing your current mortgage.

Things to Think About When Refinancing

When you bought your home, your primary objective may have been getting the home you wanted at a price you could afford. Due to booming real estate prices, lenders developed mortgage products to help people qualify for the mortgage amount they needed. These mortgages have features such as adjustable rates, negative amortization, or interest only payments. Refinancing to a step rate can allow you to eliminate these features while gaining the benefits of a step rate mortgage:
  • Typically, you will enjoy a fixed interest rate for a period of 5 to 7 years.
  • Step rate mortgages are fully amortized, meaning you will be paying down the principal balance.
  • A fixed rate provides a stable monthly principal and interest payment each month.
Step rate mortgages can resolve issues such as adjustable mortgage payments, and eliminating increasing principal balances associated with negative amortization. Check with your lender to get the details on refinancing to a step-rate mortgage.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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