What is a 'teaser rate' in mortgage lending?

A 'teaser rate' in mortgage lending refers to an initial, temporarily reduced interest rate offered on a loan. This is typically a promotional interest rate that is lower than the market rate and is designed to attract borrowers by providing a more affordable monthly payment at the beginning of the loan term. The teaser rate is often valid for a specific period, usually for the first few months or the first couple of years of the loan, after which the interest rate will adjust to a higher rate, often significantly higher than the initial rate.

This initial lower rate can make it easier for borrowers to qualify for loans they might not otherwise be able to afford, thereby stimulating the borrowing process. Understanding teaser rates is crucial for borrowers, as they should be aware of how long this reduced rate lasts and what the subsequent rate will look like when the teaser period ends. This knowledge allows borrowers to better plan their financial future and understand the total cost of borrowing over the life of the loan.