Two-step Mortgage Definition

A two-step mortgage is a mortgage with two fixed interest rates existing at defined points in the mortgage process. An initial fixed-interest rate is offered during the beginning of the mortgage and then at some specified time, usually between five and seven years, the interest rate is adjusted to then prevailing market rates.

Sometimes, the borrower has the option of converting the fixed-rate mortgage to an adjustable rate mortgage at the point in time the rate changes. Many two-step mortgage holders plan to either move or refinance prior to the interest rate step, though of course if interest rates are falling the step adjustment might be beneficial to the borrower.