Mortgage interest rates are complex, and often leave borrowers confused and bewildered. Several factors determine the mortgage interest rate for an applicant, such as credit score, loan type, and loan amount.
Mortgage teaser rates can be even more complex, so we want help you understand how these mortgage rates work, and how you might benefit from an adjustable rate mortgage.
Definition of Teaser Rate
A teaser rate is the introductory (or teaser) interest rate at the beginning of an adjustable rate mortgage (ARM), and is customarily lower than a fixed-rate mortgage. After the introductory period, the interest rate fluctuates according to the terms of the mortgage.
The teaser rate can be as low as 0%, and is used to attract customers by offering a low rate on the mortgage. The increased interest rate must be disclosed to an applicant before closing, according to Fair Credit and Charge Card Disclosure Act.
Information about Teaser Rates
Teaser rates are common in adjustable-rate mortgages (ARMs), which are fixed for a time and then adjust per the terms of the mortgage.
Borrowers should weigh the pros and cons of an adjustable rate mortgage and teaser rate, in light of their specific circumstances. Mortgage payments move up and down over time with adjustable rate mortgages, which can result in paying more or less for a home.
Protection of Borrowers
To protect borrowers and decrease the likelihood of default, the Consumer Financial Protection Bureau (CFPB) enacted the Ability to Repay Rule (ATR) in 2014. This rule eliminates qualifying a buyer based on a low teaser rate. Lenders must consider potential mortgage rate increases, and the ability for borrowers to make payments over time. Every reasonable effort by the lending agency is required to protect buyers from losing their home.
Before the Ability to Repay Rule, teaser rates were sometimes used to qualify buyers for a home loan they could not qualify for otherwise. The teaser rate made the mortgage payment much lower at the beginning of the term, but once the interest rate went up the buyer could not make the payment.
Benefits of Teaser Rates
Money saved from a teaser rate can be substantial, while also avoiding negative amortization.
Negative amortization occurs when a mortgage payment is not sufficient to cover the interest portion of the mortgage. The result, then, is an increase in the principal balance to cover the interest that was not paid. Since the teaser rate for an adjustable rate mortgage is the agreed upon interest rate for the mortgage, the borrower avoids negative amortization, even if the introductory interest rate is zero.
One of the best scenarios for borrowers to benefit from an adjustable rate mortgage with a low teaser rate is in a low interest rate environment where they live in the home for just a few years.
Timing is Everything
Buyers should be acutely aware of possible interest rate increases that could raise their mortgage payment over time.
A borrower that will only live in the home during the teaser rate period could greatly benefit from an adjustable rate mortgage. These borrowers should be aware of the expiration of the introductory rate, and the possible need to sell the home or refinance.
Marimark Mortgage serves the mortgage needs of borrowers in all of Florida, Virginia, and Pennsylvania.
As a mortgage originator, we specialize in conventional home mortgages, FHA, VA and USDA mortgage options, refinance loans, and reverse mortgages. We’ve also worked extensively with HARP refinancing to help clients lower their payments on their home.