Initial Interest Rate

Categories: Credit

Every time you take out a loan, it’s important to read the fine print. That’s because the interest rate you obtain might not be the interest rate you pay over the life of the loan should it be adjusted or reset. The initial interest rate, or teaser rate, is the rate you’d get on Day One of a variable interest rate loan.

But if you’ve got an adjustable or variable rate, well...you might be paying more every time that the Federal Reserve feels the economy needs higher loan payments. The 2008 mortgage crisis was littered with cases of homebuyers who received a teaser rate, only to see their interest payments balloon to unaffordable levels. Foreclosures ensued on a massive scale.

Initial interest rates are typically lower with variable than with fixed rates. That’s why you have to read the contract, and never trust the guy trying to get you to sign the dotted line without a lawyer.

And be wary of anyone who says they can get you a lower rate from your initial rate. Interest rate reduction scams are quite popular and difficult to spot. A finance course would help you avoid them.

Related or Semi-related Video

Finance: What is Adjustable-Rate Mortgag...17 Views

00:00

Finance allah shmoop What is adjustable rate mortgage or arm

00:08

Well here's an arm and here's a leg and that's

00:11

What Renting the money to buy a home costs you

00:14

Yeah Okay Eight r m stands for adjustable rate mortgage

00:17

The rate well that's The interest cost of the money

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or the cost of renting that money to buy the

00:23

home Well the rate isn't it fixed in this case

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like five point seven percent for thirty years Where you

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know in advance that your monthly payments going to be

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nine hundred forty three bucks a month or whatever it

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is that would be a fixed mortgage a fixed number

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You can count on it for all three hundred sixty

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payments And then the house is all yours So that's

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fixed then what's adjustable like yes the interest rate changes

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But how does it change Well in a standard arm

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there is some global standard on which the rates are

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often price like lie bore the london interbank borrowing offering

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rate It's one of the key things that price is

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the cost of renting money all around the world with

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the actual rate of libel or is generally reserved for

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banks like super cheap cost of renting money to banks

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who are very likely to pay back the money with

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no hassle that rate is more or less what banks

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pay for running the money along with blue chip customers

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in real life The banks then mark up a premium

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on top of the rate that they're paying to rent

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the money to themselves And then they resell or re

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rent that money teo their prized customers So the pricing

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of bank my views in renting money to joe six

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pack could be something like lie boer plus three percent

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or three hundred basis points So if libel or is

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it didn't say two and a half percent today the

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adjustable rate might be five and a half percent and

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all that's great honor given alone It might mean that

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for a while you're paying seven hundred twelve dollars a

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month for your house payment wonderfully cheap and in fact

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banks market these low rates initially to help people be

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able to afford tto by that new home and live

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of the dream You know the american dream usually with

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an arm there's a teaser rate that starts really low

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Like at live or live or plus ten basis points

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or something like ridiculously cheap for six months or a

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year something like that Then it has an incremental set

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of step ups in interest costs and venit adjust with

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the markets usually upward maybe upward by a lot Remember

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there's a reason it's called a teaser rate but then

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if we get inflation or a you know just bank

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nervousness for there are weird effects from brexit or the

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volume of transactions going through london or something weird happens

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Well then the liquidity drops and interest rates rise So

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now lie board goes up and up and up to

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four and a half percent and wealth contractually in your

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mortgage paperwork you have to pay live or plus three

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hundred basis points no matter what So now that's seven

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and a half percent interest on the dough you borrowed

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and well we're that toe happen It's likely that your

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monthly payment has skyrocketed from seven hundred twelve dollars a

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month is something more like twelve hundred dollars a month

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or more Can you handle that big of a payment

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Well have you done a fixed rate loan at nine

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Hundred forty three dollars a month Well you'd still be

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paying on that number but you rolled the dice with

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an arm and now you owe big bills There go

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that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh

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