DEFINITION of 'Teaser Loan'

An adjustable-rate mortgage loan in which the borrower pays a very low initial interest rate, which increases after a few years. Teaser loans try to entice borrowers by offering an artificially low rate and small down payments, claiming that borrowers should be able to refinance before the increases occur.

BREAKING DOWN 'Teaser Loan'

Teaser loans are considered an aspect of subprime lending, as they are usually offered to low-income home buyers. Unfortunately, when these borrowers try to refinance the loan before the rate increases, most will not qualify for standard mortgages. This leaves borrowers with increased monthly payments, which many cannot afford. This method of loaning is considered risky, as default rates are high.

RELATED TERMS
  1. Credit Card Teaser Rate

    A lower-than-normal interest rate that a credit card company ...
  2. Teaser Rate

    An initial rate on an adjustable-rate mortgage (ARM). This rate ...
  3. Credit Crisis

    A crisis that occurs when several financial institutions issue ...
  4. Initial Rate Period

    The period of an introductory or "teaser" interest rate on a ...
  5. Refinance

    1. When a business or person revises a payment schedule for repaying ...
  6. Origination

    The process of creating a home loan or mortgage. During the origination ...
Related Articles
  1. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  2. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  3. Small Business

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  4. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  5. Investing

    Subprime Lending: Helping Hand or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  6. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  7. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  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

    Interest-Only Mortgages: Home Free or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    Interest on variable interest rate loans vary as market interest rates change. Interest on fixed interest rate loans will ... Read Answer >>
  2. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  3. What are the differences between delinquency and default?

    Find out more about loan delinquency, loan default, and the difference between a loan borrower defaulting and being delinquent ... Read Answer >>
  4. How do construction loans work?

    Construction loans are obtained either by the prospective home owner or the actual builder. There are two types of construction ... Read Answer >>
  5. 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 >>
Trading Center