Initial Interest Rate


DEFINITION of 'Initial Interest Rate'

The interest rate that is initially assessed on an adjustable-rate mortgage (ARM) and advertised in the origination process. The initial interest rate will be in force for a limited period of time, typically between 12 and 24 months. After this window of time is closed, the interest rate will reset itself to an index plus spread value that is higher than the initial rate.

May also be called a "teaser rate".

BREAKING DOWN 'Initial Interest Rate'

ARMs with this feature were extremely popular in the 2005 and 2006 period that defined the late stages of the subprime mortgage boom. With interest rates on the rise during this time, these initial teaser rates were key to getting new customers, who might otherwise be deterred by the mortgage costs, to purchase homes. Many customers didn't fully realize what they were getting into, as the fully indexed rate was higher than many could afford. In these situations, the only way the mortgage could be serviced is if the borrower could refinance the entire loan using real estate appreciation equity as the cushion for the switch.

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  1. What is a subprime mortgage?

    A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result ... Read Full Answer >>
  2. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  3. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  4. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  5. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  6. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>

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