Stepped Rate Mortgages

Stepped rate mortgages are a great way to save money, especially for
people who want to minimize their monthly mortgage payments when
they first buy their home. A stepped rate mortgage offers different
interest rates during the term of the mortgage. Most stepped rate
mortgages offer a discount rate to begin with, which rises after a certain time,
and then rises again.

Other stepped rate mortgages start with a higher interest rate,
which gradually decreases over the term of the mortgage. A stepped rate
mortgage with a five-year term may have as many as 10 different
interest rates during that time, which offers the borrower several
different interest rate options over the five-year period.

There are a few different types of stepped rate mortgages,
each geared for a specific type of homebuyer:

• Stepped with cash back - This type of stepped rate mortgage is geared
toward first time buyers who are short of money. Typically, they offer
a .5% or 1% cash back bonus, coupled with an initial rate that is
discounted off the bank’s usual mortgage rates. This rate will gradually
rise to match or be slightly higher than the usual rates. The cash can
be used for any moving expenses,
or can often be used to pay down the principal of the mortgage.
• Stepped tracker - These stepped rate mortgages are designed for
the buyer who wants to keep their payment as low as possible.
The interest rate is tied to the Bank of England Base Rate, which fluctuates
throughout the term of the mortgage. For example, for the first six
months it may be .5% higher than the base rate, then 1% higher
for a year, and so on. These stepped rate mortgages are good if
you do not mind gambling that the base rate will stay low.

• Fixed steps - This is a lower-risk type of stepped rate mortgage,
and is good for buyers who want to be sure of their interest rate
throughout the term of their mortgage. In either descending or ascending
steps, the mortgage will go through several different predetermined
interest rate changes. This is a good fit for people who want to know
precisely what their payment will be throughout their mortgage term.

When you are shopping for a stepped rate mortgage, be sure to look
at what sorts of early re-mortgaging or payoff penalties exist for that
product. Many stepped rate mortgages will make you pay a hefty
price for trying to re-mortgage after the first (and lowest) interest rate
expires. You want the most flexible product possible in order to
be able to take advantage of changing market conditions throughout the
term of your mortgage.