Did u get offered interest rate for a home loan that just sounds to good to be true? It probably is!
A teaser rate is a bank or lender version of a loss leader in the marketing world. It is nothing more then a short-term benefit offered to perspective borrowers on loans by lenders. The rate on whatever loan product is being marketed starts at a comparatively lower interest rate to lure new business and promptly gets raised after the brief promotional period is over.
There are two especially common loan products that banks and other lenders typically utilize a teaser rate to appeal to perspective borrowers.
The ARM Teaser – Adjustable Rate Mortgages
Many times lenders will advertise extra low-interest rates on ARM products. For example the initial rate may start at 2% for the first 12 months followed by a mortgage reset rate at 7%. If the typical adjustable mortgage rate is 4.5% for the industry then the teaser rate of 2% seems great. However the lender makes that up when the mortgage resets. Also the lenders will typically include a penalty clause in the fine print for paying off the loan early which ensures they will make their money one way or the other.
Credit Card Balance Transfer Offers
This is a classic promotional deal used by credit card issuers to get borrowers to transfer their current credit card balance from one card to a new card. Credit card companies will often offer 0% interest as the rate for a short period of time and then jack up the rate permanently after the said period is over.
I should mention though that the credit card teaser rate can actually be a great opportunity for a borrower to get out of debt. the idea is to pay off the entire credit card before it resets. borrowers just need to be sure to read all the fine print because there is often fees that are included in these deals that can off set the desired savings.