Teaser Rate

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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).

INVESTOPEDIA EXPLAINS'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.

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RELATED FAQS
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    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 Full Answer >>
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    Subprime mortgages are usually the culprit that gets blamed for the housing bubble burst in the 2000s. After the housing ... Read Full Answer >>
  3. What industries use the loan to value ratio?

    The financial sector and mortgage investment industry use the loan-to-value ratio to assess the lending risk of mortgages. ... Read Full Answer >>
  4. How have low interest rates affected the real estate sector?

    Low interest rates stimulate the real estate sector by encouraging home-buying activity and by making it less expensive for ... Read Full Answer >>
  5. Is the prime rate in the US different from the federal funds rate?

    Although the prime rate and the federal funds rate are closely tied to one another, their base rates differ based on market ... Read Full Answer >>
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