Initial Interest Rate
Definition and meaning of Initial Interest Rate in real estate.
The initial interest rate is the starting rate on an adjustable-rate mortgage (ARM) at the beginning of the loan term. This rate remains fixed for a specified introductory period before it begins to adjust periodically based on market index movements.
In more detail
Also known as the start rate or teaser rate, the initial interest rate is typically lower than the rate offered on a comparable fixed-rate mortgage. This lower starting rate helps home buyers qualify for a larger loan amount or enjoy lower monthly payments during their first few years of homeownership.
However, borrowers must prepare for potential rate increases once this introductory phase expires. The length of time this rate remains in effect is defined by the loan's initial rate duration.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Start rate, teaser rate, or introductory interest rate |
| Usual duration | Typically ranges from three to ten years depending on the loan structure |
| Watch out for | Payment shock when the introductory period ends and the rate rises |
A home buyer secures a 5/1 adjustable-rate mortgage with an initial interest rate of four percent, guaranteeing them low monthly payments for the first five years before the rate adjusts.
Frequently asked questions
Is the initial interest rate guaranteed?
Yes, but only for the introductory period specified in the loan agreement, after which it will change according to market index shifts.
Why do lenders offer a lower initial rate?
Lenders offer a lower start rate to attract borrowers and make the loan more affordable initially, shifting the risk of future rate rises to the borrower.