Step-Rate Mortgage

A step-rate mortgage is a type of adjustable-rate mortgage loan that allows for an increase in the interest rate after given time periods during the specified length of the loan. For example, a two-step mortgage loan would involve initiating the loan at one interest rate and then adjusting that interest rate at some pre-defined time to a rate consistent with the market. The initial interest rate might be four percent, and after two years, the lender and borrow agree that the interest rate will change to the market rate, which could be much higher. Banks will offer step-rate mortgage loans if they believe interest rates will increase in the future. Borrowers typically take on a step-rate mortgage loan only if they believe they will be able to refinance their loan before their rate increases.