If you’re shopping for a loan, especially if it’s your first time or if it’s been a long time, you’re probably looking for the lowest interest rate available. That’s a great start, but it’s important to really understand what those low rates are, how they change and how and when to take advantage of them.
What Is A Teaser Rate?
Teaser rates are usually short-term inducements offered to attract new customers to variable-rate consumer loans. You’ve probably seen credit cards that offer a 0% introductory rate, for example. In real estate, you’ll find teaser rates on variable interest products like adjustable rate mortgages (ARMs) and HELOCs.
How Do Teaser Rates Work?
A teaser rate is an unusually low, sometimes 0%, introductory interest rate offered for a consumer loan. When the introductory rate expires, the rates reset, often dramatically, and customers begin to see high interest rates applied to their balances and reflected in their monthly minimum payments.
The two most common uses of teasers in the consumer loan market are:
- Credit card offers
- Variable interest rate mortgage products
How Do Teaser Rates Work In Real Estate?
Right now, interest rates are so low for fixed-rate mortgages that ARMs are not as popular. In general, they’re worth a look only if you need a lower payment and you’re planning on moving in a short time frame. Note that Rocket Mortgage® is not currently offering ARMs or HELOCs.
Adjustable Rate Mortgages (ARMs)
When most people think of mortgages, they typically think of the 20% down, 30-year fixed-rate mortgage. But the mortgage industry offers a wide array of loans, designed to meet the needs of today’s borrowers. That means some, mostly younger, home buyers in more expensive real estate markets are looking for affordable monthly payments as they work to establish their careers. Enter ARMs. These loans offer extremely low interest rates in the short run, but few guarantees on what loan rates will be in the future.
Those loan rates are not technically teaser rates, because ARMs by their nature offer lower rates that are fixed during the first few years of repayment. But you have to read the fine print carefully. If you’re considering what’s called a payment option ARM, one of the choices you might be given each month is a teaser rate that lowers that month’s payment. Unfortunately, the difference between your regular payment and your selected payment then gets added back to the loan and you have to pay it back later, with interest. Stay away from these types of loans.
A home equity line of credit, or HELOC, is a line of credit tied to your home equity. Think of a HELOC as a debit card that takes money from your home instead of a bank account. HELOCs allow you to take money out during the first part of the loan and then, when that period closes, the repayment period begins.
During the spending period, the homeowner only needs to repay the interest on the money taken. But that interest rate is variable, and so the monthly minimum payments also vary. You might have a teaser rate during this period, but when repayment begins, you'll have to pay whatever interest is specified in the contract.
Should I Accept An Offer With A Teaser Rate?
If you are shopping around for a mortgage or any other type of consumer loan, you should always look for the annual percentage rate, or APR. This will allow you to compare loans on an apples-to-apples basis. An APR takes into account all loan costs, not just interest rates. This will give you a better way to compare offers to make sure you’re not paying more than you should.
Most financial experts advise against teaser rates, mostly because, although you’ll save a few dollars upfront, you’ll probably end up paying more for that credit in the long run. After all, these offers come from businesses that are laser-focused on profitability.
The one use that makes sense in the credit card field is transferring balances from high-interest credit cards to low-to-no interest rate cards while you pay down the debt. If you can pay the debt down, or at least put a significant dent in it during that introductory period, you’ll save a year’s worth of interest payments.
The Bottom Line
As with most things in life, if the interest rate being offered seems too good to be true, it probably is. And you’ll probably pay back what you initially saved and then some, or companies wouldn’t offer them in the first place. Want to learn more about managing your credit? As always, we’re here to help.