Do Teaser Rates Really Save You Money?

An update to the mortgage rates post:

One of our clients asked whether it was worth getting a "teaser" rate from the mortgage company. I did the calculations on some of the teaser rates that are being offered right now on variable rate mortgages of a 5 year term. I've used 40 year amortization to "amplify" the differences...

Example:

$150,000 mortgage

1) 3.00% for six months and then 4.35% for the remainder of the 5 year term versus,
2) 3.45% for 10 months and then 4.35% for the remainder of the 5 year term versus,
3) 4.15% for the entire 5 year term.

Scenarios 1 and 2 were almost exactly the same on the amount of interest saved for the teaser period (approximately $750) but both scenarios would be significantly more expensive in interest than just taking the rate in Scenario 3 for the entire term of the loan.

You would have paid almost $800 less interest and therefore paid $800 more down on your principal over the 5 year term.

The only comparison that remains to be done is if you took advantage of the teaser period to pay down more principal until the period is over. First, the bank must give you the flexibility to do so and secondly, you must have the discipline to do so.

The take-home message is:

In some cases.. TEASER RATES ARE CREATED TO FOOL YOU INTO PICKING A PRODUCT THAT COSTS YOU MORE MONEY IN THE LONG RUN!