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.

BREAKING DOWN '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. Mortgage Rate

    The rate of interest charged on a mortgage. Mortgage rates are ...
  3. Variable Rate Mortgage

    A type of home loan in which the interest rate is not fixed. ...
  4. ARM Index

    The benchmark interest rate to which an adjustable rate mortgage ...
  5. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  6. Canadian Rollover Mortgage

    A home mortgage with an adjustable rate feature. The Canadian ...
Related Articles
  1. Personal Finance

    Shopping for a Mortgage in 2017? Use This Tool First

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2017 can all be done online.
  2. Investing

    Today's Current Mortgage Rates: May 21, 2017

    Find the current day's mortgage rates offered by Investopedia Partners and learn more about what may impact rates in the upcoming weeks.
  3. Personal Finance

    5 Things You Shouldn't Tell Your Mortgage Broker

    Applying for a mortgage can be a strenuous process. Here are five things to avoid doing when meeting with your mortgage broker.
  4. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
  5. Financial Advisor

    Effect of Fed Fund Rate Hikes on the Housing Market

    Understand what drives the federal funds rate and why the Fed would increase that rate. Learn about the effect of a rate increase on the housing market.
  6. Personal Finance

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  7. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  8. Personal Finance

    Now's a Terrific Time to Buy (or Refinance) a Home

    If you are looking to make a purchase or do a refi, you will benefit from continuing low interest rates – that could dip even lower.
  9. Personal Finance

    7 Mortgage Trends To Expect In 2011

    How will the year compare to 2010? What's likely to be different?
  10. Investing

    The Most Important Factors that Affect Mortgage Rates

    Discover what the most important factors are that affect mortgage interest rates. Factors range from inflation and economic growth to Federal Reserve activity, .
RELATED FAQS
  1. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
Trading Center