Teaser Rates
A teaser rate is a low introductory rate that is usually offered for the first few months as an incentive to choose a certain mortgage program.
There isn’t an adjustment to fee for a teaser rate, but it may reduce the rebate the bank or broker receives. And you may be able to secure a slightly lower margin if you opt-out of the teaser rate. But many teaser rates can provide savings that will prove more valuable than a small difference in margin.
Many home equity lines come with teaser rate specials, such as 1% below prime for the first 3 months, or prime minus 2% for the first 6 months.
These teaser rates are limited in the length of time that they’re offered, but are not considered negative-amortization despite being offered below the actual interest rate.
A teaser rate offers homeowners a great opportunity to pay lower monthly payments for the first few months of the loan. The savings can be rather considerable depending on the actual interest rate of the mortgage product.
Let’s look at an example:
Home Equity Line of Credit
Prime rate: 8.25%
Margin: 2.25
Teaser rate: 1% below prime for first 3 months
Your actual interest rate is 10.5%, or prime plus margin. But for the first 3 months the bank will offer an interest rate of 7.25%. That can amount to substantial savings, and though you’re paying less than your actual interest rate, the loan is not amortizing negatively. Meaning you won’t owe that money back later, as the teaser rate is the actual interest rate for the few months it is offered.
Always look for teaser rates, as they save you a ton of money. But don’t be fooled into thinking you can pay less forever. And don’t choose a mortgage program based on its teaser rate alone. Eventually the interest rate will rise, and the payment shock could take you by surprise.
