Definition
An introductory rate is a temporary interest calculation that is expected to increase after a specified period of time. These are frequently called promotional rates or teaser rates.
Analysis
Teaser rates are designed to lure borrowers with below-market interest rates. They are valid for a temporary period of time, at which time the rates are reset to higher interest rates.
A credit card solicitation may offer a promotional rate that is valid for the first six months. After the promotional period, any revolving balance held on the card account would be subject to higher interest rates.
Credit cards frequently use teaser rates on balance transfers as well as on initial opening agreements. The balance transfer fees can often cancel out much of the savings from a lower interest rate.
Adjustable Rate Mortgages (ARMs) lure loan applicants by promising a very low interest rate that is well below market rates. This low rate is usually guaranteed for 2 years, at which time the rate will reset to another interest rate based on market rates at that time.
Unsuspecting homebuyers choose ARMs because they have a lower initial monthly payment. If the rate resets to a higher interest rate, many ARM customers are unable to afford the resulting higher monthly payment.
