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.


RELATED TERMS
  1. Teaser Rate

    An initial rate on an adjustable-rate mortgage (ARM). This rate ...
  2. Adjustable-Rate Mortgage - ARM

    An adjustable rate mortgage is a type of mortgage in which the ...
  3. Indexed ARM

    An adjustable-rate mortgage on which the interest rate adjusts ...
  4. Discretionary ARM

    An adjustable-rate mortgage on which the lender has the right ...
  5. 5-6 Hybrid Adjustable-Rate Mortgage ...

    An adjustable-rate mortgage with an initial five year fixed interest ...
  6. Reset Date

    The point in time when the initial fixed interest rate on an ...
Related Articles
  1. Personal Finance

    The Best Candidate For an Adjustable Rate Mortgage

    Adjustable-rate mortgages aren't for everyone, but they make sense if you are a short-term homeowner or can pay off the loan before it readjusts.
  2. Personal Finance

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  3. Personal Finance

    This ARM Has Teeth

    Find out how to avoid getting bitten when your mortgage rate resets.
  4. Investing

    Mortgages: Fixed Rate Versus Adjustable Rate

    Choosing the right mortgage can help homebuyers avoid costly mistakes. Learn the difference between fixed- and adjustable-rate loans.
  5. Personal Finance

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  6. Personal Finance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  7. Personal Finance

    Fixed Or Variable-Rate Mortgage: Which Is Better Right Now?

    Find out the benefits of fixed- and variable-rate mortgages, and learn which option is best for you.
  8. Personal Finance

    5 Risky Mortgage Types To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  9. Personal Finance

    5 Secrets You Didn't Know About Mortgages

    Being savvy about the ins and outs of mortgages can mean big savings in the long term.
  10. Personal Finance

    Shopping for a Mortgage in 2017? Use This Tool First

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2017 can all be done online.
RELATED FAQS
  1. Is an adjustable rate mortgage (ARM) safe?

    Learn why an adjustable rate mortgage (ARM) can be a safe option as long as the borrower is familiar with the underlying ... Read Answer >>
  2. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  3. 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 Answer >>
Trading Center