Definition - What does Two-Step Mortgage mean?
A two-step mortgage is a mortgage that has two different interest rates for two different time periods.
An initial interest rate is given for the mortgage for a beginning period such as 5–10 years. Then, after this period concludes, a new interest rate is given for the loan. The second rate is taken from current market interest rates.
In the context of the law, two-step mortgages are legally binding contracts and must be paid or else the mortgage holder could face foreclosure.
Justipedia explains Two-Step Mortgage
The risk of two-step mortgages is that the interest rates could end up being higher during the second interval. For example, if the interest rate is at 3.5 %, and then it switches to 5.5 % in the second interval, this could result in the mortgage holder owing a lot more money. So, these types of mortgages might not be wise decisions for everybody.
However, for those who are expecting to sell their homes in the first interval, or for those who expect to be making significantly more money in the second interval, two-step mortgages could work well.