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. Fixed-Period ARM

    An adjustable-rate mortgage (ARM) with an initial fixed-interest-rate ...
  2. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  3. Hybrid ARM

    A hybrid adjustable-rate mortgage blends the characteristics ...
  4. Mortgage Index

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

    1. The risk that an early unscheduled repayment of principal ...
  6. Interest Rate Cap Structure

    Limits to the interest rate on an adjustable-rate loan - frequently ...
Related Articles
  1. Credit & Loans

    4 Steps To Attaining A Mortgage

    It starts with knowing your choices as well as your price range. We show you how to get there.
  2. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  3. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  4. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  5. Credit & Loans

    Are APRs different in different countries?

    Learn about the term APR and how it is used in the United States and other countries. Explore why different lenders charge different APRs.
  6. Credit & Loans

    What loans do and don't have an APR?

    Learn about what annual percentage rates (APR) are and what they mean. Explore different fixed and variable APRs charge by different lenders.
  7. Credit & Loans

    What are the pros and cons of owning an equity REIT versus a mortgage REIT?

    Learn about investing in equity, mortgage and hybrid REITs. Explore the different strategies REITs employ to generate income and create dividends.
  8. Credit & Loans

    What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information relating to total outstanding debt.
  9. Home & Auto

    What factors should I consider when shopping for the best mortgage lender?

    Comparing lenders to obtain the best mortgage loan requires research and willingness to shop around for the best loan to fit individual needs.
  10. Credit & Loans

    Buying A House? Avoid These 7 Mistakes

    Owning your own home gives you a feeling of independence that renting can’t offer, and there are big financial benefits, too.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center