A 2-step mortgage is a combination of both fixed-rate mortgages and adjustable-rate mortgages. Generally speaking, the first 5-7 years of the mortgage are treated like a fixed-rate mortgage. During the remainder of the term, known as the second step, the interest rate is allowed to fluctuate like an adjustable-rate mortgage.
During the initial first step of a 2-Step mortgage the interest rate is generally lower than for a fixed rate mortgage but higher than for an adjustable rate mortgage. The benefit of this type of mortgage is that it initially offers the home buyer a lower interest rate than those found in fixed rate mortgages while still retaining the stability of a fixed payment and interest rate for the first few years of the loan. The home buyer still needs to keep in mind that in the second step, or adjustable-rate portion of the mortgage, the interest rate may move either up or down, depending on the economy. As mentioned in the above section on Adjustable Rate Mortgages, a mortgage conversion feature can sometimes add a cushion of security to this type of mortgage.