Two-Step Mortgage

A two-step mortgage is a type of mortgage that offers two different interest rates. For the first several years of the loan, the rate is a fixed. At a pre-determined date, the rate changes to an adjustable rate. This adjustable rate remains in effect for the remainder of the loan. Some borrowers like the two-step mortgage because the initial short-term rate is typically low. However, one should be aware that there is a possibility that the second rate is higher than expected. The second interest rate is adjustable and is based on the market at that time. Hence, the buyer is unable to determine what that rate may be at the time of signing. However, borrowers may be offered other alternatives when the time comes for the adjustable rate to apply, which may include a reasonable fixed rate.