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Teaser interest rate

A teaser interest rate is a well below market interest rate used as a come-on to encourage a borrower to sign a loan application for an ARM.

Expanded Definition

The special rate expires after a specified period, and the rate resets to the one calculated as specified in the ARM contract. Teaser rates can be loss leaders.

Many have been attracted to mortgages they cannot afford once the ARM resets. Previously they could refinance at a lower interest rate using the equity accumulated in their property while housing prices were rising quickly. But declines in housing values have caused many to lose what little equity they had and sometimes to lose their homes in foreclosure.

Those who borrow with ARMs should be careful to fully understand the formula used to calculate the interest rate and the monthly payments required once the teaser rate expires.

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