What does a lower initial interest rate than the fully indexed rate suggest?

What does a lower initial interest rate than the fully indexed rate suggest?

• A. Higher overall loan costs
• B. Potential cost savings
• C. A possible discount
• D. No change in loan terms

Answer: (C)

A lower initial interest rate compared to the fully indexed rate typically indicates a temporary discount on the loan's interest. This is often seen in adjustable-rate mortgages (ARMs), where the initial rate is set lower to make the loan more attractive to borrowers. This initial rate, sometimes referred to as a "teaser rate," is designed to entice potential borrowers, allowing them to benefit from a reduced payment during the introductory period. Once this period expires, the rate will adjust based on the applicable index and margin, potentially leading to a significant increase in monthly payments. Thus, while the lower initial rate might seem advantageous at first, borrowers must be aware that it is a short-term benefit, and higher rates may follow.

A lower initial interest rate compared to the fully indexed rate typically indicates a temporary discount on the loan's interest. This is often seen in adjustable-rate mortgages (ARMs), where the initial rate is set lower to make the loan more attractive to borrowers. This initial rate, sometimes referred to as a "teaser rate," is designed to entice potential borrowers, allowing them to benefit from a reduced payment during the introductory period.

Once this period expires, the rate will adjust based on the applicable index and margin, potentially leading to a significant increase in monthly payments. Thus, while the lower initial rate might seem advantageous at first, borrowers must be aware that it is a short-term benefit, and higher rates may follow.