Teaser Rate
Definition and meaning of Teaser Rate in real estate.
A teaser rate is a low, introductory interest rate offered on an adjustable-rate mortgage to attract borrowers. This rate is temporary and is scheduled to adjust to a higher, market-based rate after the introductory period ends.
In more detail
Lenders use these initial rates to make mortgages look more affordable, helping buyers qualify for loans or lower their early monthly payments. The teaser rate typically lasts for a brief period, ranging from several months to a few years, before the loan transitions to its fully indexed rate.
Once this adjustment occurs, borrowers often experience a significant increase in their monthly payments, a scenario known as payment shock. It is critical for home buyers to understand the maximum rate cap and how high their payments could go once the teaser period expires. Borrowers should not rely on refinancing or selling the home before the adjustment, as market conditions can change.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Duration | Typically runs from six months to a few years |
| Primary risk | Payment shock when the interest rate adjusts upward |
| Applies to | Adjustable-rate mortgages and home equity lines of credit |
A borrower signs an adjustable-rate mortgage with a teaser rate of three percent for the first year, which then adjusts to six percent in the second year, raising their monthly payment.
Frequently asked questions
Can a teaser rate stay the same forever?
No, a teaser rate is by definition temporary. The loan agreement will specify exactly when the rate will adjust and how the new rate will be calculated based on financial indexes.
Why would a buyer choose a loan with a teaser rate?
Borrowers might choose this option if they plan to sell the home or refinance the mortgage before the introductory period ends, or if they expect their income to increase significantly in the future.