DEFINITION of '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).

BREAKING DOWN 'Teaser Rate'

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.

RELATED TERMS
  1. Initial Interest Rate

    The interest rate that is initially assessed on an adjustable-rate ...
  2. Adjustable-Rate Mortgage - ARM

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

    An interest rate charged on loans to borrowers that is calculated ...
  4. Discretionary ARM

    An adjustable-rate mortgage on which the lender has the right ...
  5. Credit Card Teaser Rate

    A lower-than-normal interest rate that a credit card company ...
  6. Floating Interest Rate

    An interest rate that is allowed to move up and down with the ...
Related Articles
  1. Personal Finance

    This ARM Has Teeth

    Find out how to avoid getting bitten when your mortgage rate resets.
  2. Personal Finance

    Adjustable-Rate Mortgage Indexes: Know Your Benchmark

    Understanding these benchmarks can help you select the most competitive adjustable-rate loan.
  3. 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.
  4. Investing

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  5. 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.
  6. Insights

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  7. 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.
  8. Personal Finance

    Millennials Guide: How to Pick the Right Mortgage

    Here’s help in finding the perfect, affordable loan for that home you have been dreaming about.
  9. Financial Advisor

    Rising Interest Rates: Who it Helps, Who it Hurts

    When interest rates rise, the impact hits some of us differently. Here's why.
  10. Investing

    The Most Important Factors that Affect Mortgage Rates

    Discover what the most important factors are that affect mortgage interest rates. Factors range from inflation and economic growth to Federal Reserve activity, .
RELATED FAQS
  1. What is the difference between a 2/28 and a 3/27 ARM?

    An adjustable rate mortgage (ARM) is a type of mortgage that has a fixed interest rate for a certain time period at the beginning ... Read Answer >>
  2. How is the Arms Index (TRIN) calculated?

    Read how to calculate the Arms Index, or TRIN, using the ratio and volume of advances and declines in any given stock index ... Read Answer >>
  3. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  4. If My Mortgage Lender Goes Bankrupt, Do I Still Have to Pay My Mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Here's what usually happens ... Read Answer >>
  5. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
Trading Center