Initial Interest Rate

AAA

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".


INVESTOPEDIA EXPLAINS '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. Bait And Switch

    A dishonest marketing tactic in which a marketer advertises a ...
  2. Spread

    1. The difference between the bid and the ask price of a security ...
  3. Locked-In Interest Rate

    Referring to a loan where the borrower and lender agree on a ...
  4. Hybrid ARM

    A hybrid adjustable-rate mortgage blends the characteristics ...
  5. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  6. Teaser Rate

    An initial rate on an adjustable-rate mortgage (ARM). This rate ...
RELATED FAQS
  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. What do mortgage lenders use the securitization food chain?

    The phrase "securitization food chain" was made popular by director Chris Ferguson in "Inside Job," a film about the 2007-2 ... Read Full Answer >>
  3. Do mortgage escrow accounts earn interest?

    A bank is not required to pay interest on any escrow accounts (also mortgage impound accounts) it holds for its customers. ... Read Full Answer >>
  4. What role did securitization play in the U.S. subprime mortgage crisis?

    The securitization of subprime mortgages into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) ... Read Full Answer >>
  5. How often is interest compounded?

    Interest can be compounded on any given frequency schedule. Common interest compounding time frames are daily, monthly, semi-annually ... Read Full Answer >>
  6. How does the loan-to-value ratio affect my mortgage payments?

    Several factors affect the mortgage rate you can obtain when you purchase a home. Lenders analyze credit histories and scores ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  2. Home & Auto

    When (And When Not) To Refinance Your Mortgage

    There are both good and bad reasons to refinance. Learn more about both here.
  3. Home & Auto

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  4. Credit & Loans

    Is it Worth Saving Up for a Bigger Down Payment?

    There are numerous low-down-payment mortgage options out there, but sometimes it makes sense to build up your savings so you can borrow less.
  5. Credit & Loans

    Is A 30-Year Mortgage Really Best?

    It's the most popular choice, but home buyers with 30-year mortgages may be paying more to finance their home than they need to.
  6. Credit & Loans

    What Are The Pros and Cons Of A 15-Year Mortgage?

    The shorter term, and higher monthly payment, are only part of the picture.
  7. Credit & Loans

    Which Is Better: A 30-Year Or 15-Year Mortgage?

    The difference in monthly payments is what homebuyers think of first when they compare the two. But have you considered these other points?
  8. Credit & Loans

    Is It Worth Buying A Second Home To Rent?

    Mortgage interest rates are low, but consider these dos and don'ts before making the leap into rental property ownership.
  9. Credit & Loans

    How To Combine Two Mortgages Into One?

    If you have a second mortgage as well as a primary, does it make sense to consolidate into a single loan? Here's how to figure it out.
  10. Credit & Loans

    Should I Consolidate My Two Mortgages?

    Consolidating your loans or mortgage may make sense for you, especially when interest rates are low. Here's what you should know.

You May Also Like

Hot Definitions
  1. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  2. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  3. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  4. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  5. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
Trading Center