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THE 3-STEP MORTGAGE
This exclusive Family Mortgage financing alternative offers several advantages for those considering refinancing.
How It Works:
An 3-Step Mortgage acts like an adjustable rate mortgage, but it is really a fixed-rate mortgage. It’s a financing method where a “stash of cash” is held in an escrow account and the money is used to reduce the monthly payment in the first two years of the loan. But where does this “stash of cash” come from? Generally this method is used for new home purchases and the seller would pay for it on your behalf. But in a refinancing situation, it may make more sense to let Family Mortgage pay for it.
Here is an example of how this would work; let’s say the current 30 year fixed rate is at 6.25%. Similar to how a No Closing Cost loan works, if you are willing to accept a slightly higher interest rate than the current market rate, the lender pays us a commission in the form of discount points. We use this commission (called the yield spread premium) to pay the cost of the 3-Step Mortgage. Typically, you would be taking a rate approximately 3/4% higher than market to get a commission equal to the cost of the 3-Step Mortgage (2.10-2.30 discount points or $4,200-$4,600 on a $200,000 loan). So using our same example above, here is how it would look with a market rate of 6.25%:
1st 12 months Payments at 5.00% interest
2nd 12 months Payments at 6.00% interest
Remaining Term Payments at 7.00% interest (years 3-30 on a thirty year loan)
The advantages to the 3-Step Mortgage are numerous:
- You leave your options open for the future. If rates decline at any time in the first three years you can refinance again with No Closing Costs and come out ahead.
- If you are adjusting from a much lower rate mortgage and your rate is going up dramatically, this is a way to “ease the pain” without any negative financial consequences. You can keep your payment nearly the same and ease up gradually.
- If you’re not planning on staying in the home less than 5 years, you come out ahead under this plan. Call us for a payback analysis.
- Much lower monthly payments on the front end of the loan when you need it most. As your income grows later, you will be able to afford the payments as they increase.
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