Many borrowers stick to choosing between a fixed-rate mortgage, and an ARM, but there are other choices out there.

In this article we will look at a couple lesser known variations; The Jumbo, and Two-Step mortgages.

Two-Step Mortgages:

These are referred to as "two-step" because they take elements from both the fixed-rate and adjustable-rate model. Generally you will have a fixed-rate and payment for a certain amount of time, then it adjusts once and you take that rate as the fixed-rate for the rest of the loan.  They generally go by names like 2/28, 5/25 or 7/23.  If you had a 5/25, the rate would be fixed for 5 years, then it would adjust and the rest of your 30 year term would be a fixed-rate at that new rate.

Many times, people do this beause they currently have a low credit score and since they don't qualify for a low rate, they will use this to secure a lower rate when their adjustment comes up.  This assumes their score has raised since the origination of the loan because of making payments on time, but if mistakes are made and the credit score doesn't raise, you could be stuck with a high rate even after it adjusts.

Jumbo Mortgages:

It is called a jumbo mortgage, because the loan amount is over what is referred to as "conforming loan" limits set by Fannie Mae and Freddie Mac.  These are the government charted corporations that buy the loans from the banks, and they guarantee the money will be there unless it's a "nonconforming" loan.  The limits change annualy for single-family homes. When someone takes out a jumbo-mortgage, they will usually be paying higher interest rates.

This loan offers people the opportunity to buy larger, more expensive homes, but at the cost of higher interest rates since the bank is taking on more risk.