Question:

What is a teaser rate mortgage?

Answer:

The teaser rate mortgage is usually an adjustable rate mortgage (ARM) with particularly low introductory rate that holds for one to several months. The idea behind a teaser rate home loan is to make it more appealing in the eyes of consumers.

There are other teaser rate loan products, not necessarily mortgages. For example, a credit card or a home equity line of credit (HELOC) may also carry a low introductory rate.

Teaser rate home mortgage loans can be harmful.

ARMs are often advertised as having ultra low teaser rate for a start, especially Option ARM home loans. Consumers who don't have a clear idea how an ARM mortgage works may select an ARM based on the unrealistic idea of super low monthly payments.

What consumers are rarely aware of is that the teaser rate holds for several months in the most. Or, it is not a teaser rate at all, but the minimum payment option of an Option ARM, leading to negative amortization.

A buydown mortgage is often advertised with a teaser rate as a result of the low rate for the first two or three years of the mortgage. For example, a 3-2-1 buydown mortgage loan will have teaser rates for the first three years of the loan, until the full mortgage rate is reached.

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Common misspellings: mortage and morgage