Understanding Teaser and Introductory Rates in Mortgages

Teaser Rates and Introductory Rates Explained

Teaser rates and introductory rates are special, often lower, interest rates offered by lenders at the start of a mortgage. These rates are typically lower than the standard rate and can be very attractive to borrowers.

What is a Teaser Rate?

A teaser rate is a significantly reduced interest rate offered at the beginning of an adjustable-rate mortgage (ARM). It is characteristically more than 3% below the Fully Indexed Accrual Rate, which is the sum of the index rate and the margin. For example, if the Fully Indexed Accrual Rate is 6.5%, a teaser rate might be as low as 3.5% for a specific period, usually one to three years, before adjusting to a higher standard rate.

Considerations for Teaser Rates

While teaser rates can make initial payments more affordable, borrowers should be cautious as the rate increase after the teaser period can lead to substantially higher monthly payments. Understanding the duration of the teaser rate and the rate post-adjustment is critical.

What is an Introductory Rate?

An introductory rate is similar to a teaser rate but can apply to both adjustable and fixed-rate mortgages. It's often a low rate offered for an initial period of the loan and may not be as deeply discounted as teaser rates.

Impact on Borrowers

Both teaser and introductory rates can initially lower mortgage payments, but it's essential for borrowers to plan for potential increases in payments after these rates expire.

Conclusion

Teaser and introductory rates can make a mortgage initially more attractive, but understanding their long-term implications is crucial. Borrowers should carefully consider these rates and ensure they can manage the potential increase in future payments.