Teaser Start Rates

The most important advantage of ARM loans over fixed-rate programs is the ARM loans' low initial start rates. These are often called teaser rates, because they are meant to attract borrowers to these slightly riskier program.

The ARM loan's start rates are typically 1.5 to 3.0 percentage points lower than comparable 30-year fixed-rate programs. In some rare occasions, the spread could be even more pronounced. The graph of the difference between the rates of short-term and long-term loans is often called the yield curve.

There have been a few brief periods when fixed-rate loans offered the nearly the same interest rates as ARM loans. This occured because the fear of long-term inflation, which controls long-term loan rates, was minimal; while the fear of short-term inflation, which affects short-term loan rates, was high. Such periods produce what is often called an inverted yield curve.

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