Two-step sintering is proposed to enhance the compactness and phase stability of yttria-stabilized zirconia (YSZ) coating on Inconel 625. The sintering treatment is denoted as low step (LS), low-first step (LFS), high-first step (HFS), and high step (HS). Low and high refer to 750 and 1200 °C, respectively. The YSZ layer was investigated using a scanning electron microscope, x-ray diffractometer, and electron backscattered diffractometer. The results revealed that three relatively compact and uniform layers consisting of Y-ZrO2 (~20 μm) and Fe2O3 (~2 μm) and Cr2O3 (~10 μm) were developed as a result of LFS treatment. The LFS treatment triggered optimum ZrO2 grain growth and the formation of the thermally grown oxides. The LS treatment was not sufficient to induce grain recrystallization and coating compaction. HFS and HS treatment resulted in a higher coating porosity and induced microcracks in the coatings. A nearly balanced fraction of 58:42 for the monoclinic and tetragonal ZrO2 phase was obtained in the LFS coating. The coating exhibited the highest hardness of 1027.10 HV, the best adhesion strength, and the lowest thermal conductivity of 4.73 W/mK. The LFS treatment is beneficial in obtaining a compact YSZ layer with high phase stability and low thermal conductivity.