In this article
- What is a teaser rate?
- Why you should pay attention to teaser rates
- Actions to take when a teaser rate is identified
What is a teaser rate?
Teaser rates are associated with adjustable rate loans, at or above target. A teaser rate is identified when the initial fixed rate is significantly below the average adjustable rate of the loan.
Each financial institution defines its teaser rate threshold. If a teaser rate exists when pricing an Opportunity, Andi will notify you with a warning tag in the Initial Rate field.
Why you should pay attention to teaser rates
You may want to use caution when pricing Opportunities that include a teaser rate, particularly due to the prepayment risk associated at the time of the rate change event.
When a teaser rate exists, borrowers may have an opportunity to refinance the loan before or at the time of the rate adjustment date. This prepayment can impact the return, as the most profitable portion of the loan (post-adjustment) is never realized.
The Opportunity profitability in the Financial Statements is a blended result of the initial fixed rate period and the post-adjustment rate period, so the impact of a teaser rate is not defined.
To help you, the Teaser Rate Warning Andi Skill puts a safeguard in place, warning you if a teaser rate is identified in an Opportunity.
Actions to take when a Teaser Rate is identified
The primary recommendation is to adjust the rate for the initial fixed period. Once the initial rate meets the teaser rate threshold, Andi’s warning tag will disappear.
If adjusting the initial rate is not an option, here are a few other strategies to consider:
- Add or increase Fees
- Add a Prepayment Option
- Reduce LTV
- Add Deposits