 Sam
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 Posted: Thu Jun 17, 2004 2:20 am Post subject: Teaser Rate - The Introductory Rate on an ARM |
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Teaser Rate or Introductory Rate is the initial low interest rate charged on an adjustable rate mortgage (ARMs). Such rates are lower than that of the fixed rate mortgages. These are offered on ARMs to lure borrowers so that they are willing to accept variable rates instead of the fixed rate home loans.
The teaser rate rises at the end of each adjustment period until the rate becomes equal to the sum of the Index rate and the margin. The margin is determined by the lender initially and retains the same value throughout the loan term.
Example: Suppose the teaser rate on your mortgage is 5.5% and would adjust upward by 1% in every 6 months. If the ARM index is 6% and the margin set by the lender is 2%, then the mortgage rate for the first 6 months will be 5.5%.
After 6 months, the rate will go up to 6.5%. The fully indexed rate is then = 6% + 2% = 8%.
After the fully indexed rate is reached, the mortgage rate will fluctuate with respect to changes in the Index. The loan payments will increase or decrease with changes in the Index Rate on the adjustment period change date.
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