Two-Step Mortgage

AAA

DEFINITION of 'Two-Step Mortgage'

A mortgage that offers an initial fixed-interest rate for a period of time (usually 5 or 7 years) after which, at a predetermined date, the interest rate adjusts according to current market rates. At the adjustment date, the borrower might have the option of choosing between a fixed-interest rate (based on current market rates) for the remaining term of the mortgage, or a variable interest rate structure for the remaining term of the mortgage.

INVESTOPEDIA EXPLAINS 'Two-Step Mortgage'

Borrowers who choose a two-step mortgage carry the risk that the interest rate on the mortgage will adjust upward after the fixed-interest rate period expires. This risk should be understood and measured. The interest rate cap structure of the mortgage, including the index to which the mortgage is tied and the margin, should be known and analyzed. Many two-step mortgage borrowers plan on refinancing or moving before the initial fixed-interest rate period ends, this itself is a risk known as refinancing risk.

RELATED TERMS
  1. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  2. Fixed-Period ARM

    An adjustable-rate mortgage (ARM) with an initial fixed-interest-rate ...
  3. Hybrid ARM

    A hybrid adjustable-rate mortgage blends the characteristics ...
  4. Interest Rate Cap Structure

    Limits to the interest rate on an adjustable-rate loan - frequently ...
  5. Mortgage Index

    The benchmark interest rate an adjustable-rate mortgage's fully ...
  6. Refinancing Risk

    1. The risk that an early unscheduled repayment of principal ...
Related Articles
  1. 4 Steps To Attaining A Mortgage
    Credit & Loans

    4 Steps To Attaining A Mortgage

  2. ARMed And Dangerous
    Insurance

    ARMed And Dangerous

  3. Mortgages: Fixed-Rate Versus Adjustable-Rate
    Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

  4. Understanding The Mortgage Payment Structure
    Credit & Loans

    Understanding The Mortgage Payment Structure

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center