What is a Teaser Rate?
In a tough housing market, the best thing you can do is thoroughly investigate all of your options. Do your research. Ask a lot of questions. If your credit is less than stellar, you may be thinking of getting an ARM with a low “teaser” rate. Before you do, be sure you know all the facts about teaser rates and what they can mean to your financial health.
What is a teaser rate? It is a low interest rate that applies at the start of the loan for a specified period of time, not the entire term of the loan. Questions you should ask regarding these types of loan:
l How long is the teaser rate in effect?
l Is it a fully amortizing rate -- in other words, is all interest being paid during the teaser-rate period? (If it’s not, you’ll have much larger monthly payments at the end of the teaser-rate period, and you’ll have a much harder time selling your house because the mortgage balance will be larger!)
l Is this an interest-only mortgage?
l Are the low up-front costs going to outweigh the possibility of foreclosure?
Do not make the mistake of betting that your income will be higher in the future. In this economy, it’s more unlikely than ever. You need to base your borrowing on your current income level, and even that is risky in the current job market.
In addition to teaser rates for mortgages, there are also credit card teaser rates, and is it a good idea to transfer balances from high-interest cards to those with low teaser rates?
As you’re probably aware, each time you apply for a new credit card, the credit company accesses your credit reports, and each time your reports are accessed, it shows up on your credit reports, and not favorably, either. Your score goes down every time it is accessed when applying for new credit. It’s much better for your score if you keep long-term relationships with just a few creditors than changing your card each time the teaser rate expires.
You also need to know that credit card teaser rates are fickle, fragile things. Make a payment late, and guess what? You go from 0% interest to 36% in a heartbeat. All this is in the fine print that few consumers ever take the time to read. They don’t read past “0% interest!” You’ll also be interested to know what “late” actually means to the credit card companies. You don’t just have to have your payment there by a certain date. It has to be there by a certain time on that date. So if the mail arrives late that day, and your envelope is opened three minutes after the due hour, it’s considered late. So always, always make sure your payments get to their destination early, not just on time.
You also need to be sure to read the fine print regarding balance transfers. If you’re counting on that teaser rate to apply to a balance transfer from a high-interest card, you’ll be unpleasantly surprised if you open your first bill and find out that there is no teaser rate for balance transfers, only new purchases. And whatever you do, make sure that balance transfers are not disguised as “cash advances.” Find out how much each ATM withdrawal will cost you too.
If you’ve already got a teaser rate card and been late with a payment or your rate’s gone up, don’t be afraid to call the card issuer and ask for a lower rate. It costs nothing to ask, and the worst they can do is say no. But at least you’ll have tried.
The point is: be wary of teaser rates. Don’t gamble away your future betting that your income will be higher down the road. Get your payments in early. Call and ask for a lower rate.