What is a teaser rate?
A teaser rate, also known as an introductory rate, is a below-market interest rate that lasts for a limited period of time.
Lenders frequently offer loans or credit cards with teaser rates to encourage customers to use these products. Loans with teaser rates offer payments that are initially significantly lower than comparable fixed-rate products.
The adjustable-rate mortgage is a popular product that boasts a teaser rate. When it is time for the rate to reset, it will adjust to a market rate that varies based on the terms of the loan. However, when the loan does reset, the borrower is likely to experience an increase in the loan’s interest rate that will result in a higher monthly payment.
This is one of the risks of taking out a loan with a teaser rate; the rate reset may make the payment too expensive for the borrower. If a homeowner has an adjustable-rate mortgage, he can try to refinance his home using a fixed-rate mortgage to secure a more affordable payment before the rate adjustment.
Consumers also may encounter teaser rates when shopping for credit cards. To attract new customers, some card issuers offer extremely low interest rates that may last a year or 18 months. However, once the teaser rate expires, the card customer can expect to pay the current market interest rate.
Teaser rate example
Carl wants to make some repairs to his home, but needs help covering the costs. He applies for a credit card that features a 1.99 percent teaser rate for 18 months. After that, the rate goes up to 15.8 percent. Carl thinks the teaser-rate period will give him enough time to pay off what he plans to spend on the card to fix up his home. Carl uses Bankrate’s calculator to figure out how to accelerate paying off the debt before the teaser rate expires.