- low initial mortgage rate that lenders charge for an adjustable rate mortgage. The rate is less than the rate charged for standard fixed rate mortgages, and lower than the fully-indexed rate on adjustable rate mortgages. The lower payment in turn makes mortgage financing more available to more potential home owners. The rate typically is reset to the market rate after a period of several months to a year.
- high initial rate offered depositors who invest in savings accounts paying money market rates. When Money Market Deposit Account (MMDA)s were first introduced in December 1982 (but not yet approved for purposes of accepting deposits), certain banks offered rates as high as 21% through repurchase agreements that were rolled into MMDAs when these high rate accounts became legal.
interest rate, applied to a mortgage loan for a limited period of time, that is lower initially than the rate justified by the current value of the index that determines the interest rate charged on the loan. It is commonly offered on adjustable-rate mortgages during the first year as a marketing technique.
introductory interest rate on an adjustable rate mortgage (ARM) designed to entice borrowers. The teaser rate may last for a few months, or as long as a year, before the rate returns to a market level. In a competitive mortgage market, some mortgage lenders may offer competing teaser rates to try to win over potential borrowers. In addition to the marketing rationale for teaser rates, lenders maintain that having a low initial rate makes it easier for homeowners to settle into a new home, with all the expenses entailed in moving in. Only portfolio lenders can offer teaser rates. Mortgage bankers cannot because they must comply with investor guidelines.
a contract interest rate charged on an adjustable-rate mortgage for the initial adjustment interval that is significantly lower than the fully indexed rate at the time. It is an incentive to encourage borrowers to accept adjustable-rate mortgage loans. In general, the interest rate reverts to the fully indexed rate at the first adjustment date.
Example: An adjustable-rate mortgage is indexed to the average contract rate for mortgage loans made by all lenders. Although the current average rate is 7%, the loan is offered at a teaser rate of 5%.