Teaser Rate

An initial rate on an adjustable-rate mortgage (ARM). This rate will typically be below the going market rate, and is used by lenders to entice borrowers to choose ARMs over traditional mortgages. The teaser rate will be in effect for only a few months, at which point the rate will gradually climb until it reaches the full indexed rate, which will be a static margin rate plus the floating rate index to which the mortgage is tied (usually the LIBOR index).

Investopedia Says:
The use of teaser rates tends to grow dramatically during times when long-term interest rates move toward historical lows. Lenders stand to make much more money on ARMs if interest rates rise, while borrowers with ARMs will be faced with high interest payments.

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1. Low initial mortgage rate that lenders charge for an Adjustable Rate Mortgage. The rate is less than the rate charged for standard fixed rate mortgages, and lower than the fully-indexed rate on adjustable rate mortgages. The lower payment in turn makes mortgage financing more available to more potential home owners. The rate typically is reset to the market rate after a period of several months to a year.

2. High initial rate offered depositors who invest in savings accounts paying money market rates. When Money Market Deposit Account (MMDA)s were first introduced in December 1982 (but not yet approved for purposes of accepting deposits), certain banks offered rates as high as 21% through repurchase agreements that were rolled into MMDAs when these high rate accounts became legal.

A contract interest rate charged on an adjustable-rate mortgage for the initial adjustment interval that is significantly lower than the fully indexed rate at the time. It is an incentive to encourage borrowers to accept adjustable-rate mortgage loans. In general, the interest rate reverts to the fully indexed rate at the first adjustment date. See Fully Indexed Rate.
Example: An adjustable-rate mortgage is indexed to the average contract rate for mortgage loans made by all lenders. Although the current average rate is 7%, the loan is offered at a teaser rate of 5%.