Definition of step loan

a type of Adjustable-Rate Mortgage for which the interest rate is adjusted only once during the term of the loan. Therefore, the loan shares some of the features of both fixed-rate and adjustablerate loans.

Example: A typical step loan features a fixed interest rate for the first 7 years of the term. The interest rate is then adjusted according to an index to better match current market interest rates. Some loans also have caps that limit how much the interest rate may be raised.