Teaser Rate

A teaser rate is an initial interest rate set deliberately below the rate that will apply for most of the product's life, offered to win the customer and scheduled to end. The word is the industry's rather than the law's, which is the first thing to know about it: there is no single body of rules called the teaser-rate rules, and the protections a customer has depend entirely on which product carries the teaser.

One federal regulation does define the phrase, in a narrow context. For the purpose of setting deposit-insurance assessments, 12 CFR part 327, subpart A, appendix C treats a teaser-rate mortgage as one kind of nontraditional mortgage loan and says: "A teaser-rate mortgage loan is defined as a mortgage with a discounted initial rate where the lender offers a lower rate and lower payments for part of the mortgage term. A mortgage loan is no longer considered a nontraditional mortgage loan once the teaser rate has expired." That is a supervisory classification of the bank rather than a consumer protection, and it is worth noticing that it lapses when the teaser does.

Because the label spans products, the useful move is to translate it into the right regulated term before asking any question about it. On a credit card the regulated object is an introductory rate under Regulation Z, and the introductory rate page owns it. On a mortgage it is a discounted initial rate on an adjustable-rate loan, and the adjustable-rate mortgage page owns the index, the margin and the caps that decide where the rate lands afterwards. On a deposit account it is a promotional yield, which has no regime of its own and which Regulation DD reaches only through its disclosure rules. That sense is the one this page covers in full.

The credit-card sense, in the two sentences it needs here. Regulation Z defines a promotional rate and, within it, an introductory rate offered in connection with opening an account, and attaches rules to both the advertisement and the later repricing. It also distinguishes an introductory rate from deferred interest, which accrues throughout and is waived only on payment in full. Both belong to the introductory rate page, and reading that page rather than this one is the right move for anyone holding a card offer.

The mortgage sense, and the one rule that matters most. On an adjustable-rate loan the initial rate runs for a stated introductory period and is then reset to an index plus a margin, subject to caps. That machinery is on the adjustable-rate mortgage page. What belongs here is the prohibition that exists because of teaser rates specifically: 12 CFR 1026.43(c)(5)(i) requires a creditor assessing repayment ability to use "the fully indexed rate or any introductory interest rate, whichever is greater", with monthly, fully amortizing, substantially equal payments. In other words a lender may offer a teaser but may not approve you on it. That provision is the direct answer to the practice at the center of the 2000s adjustable-rate market, and the mortgage underwriting page works the arithmetic of the gap it closes.

The deposit sense, which Regulation DD reaches only through disclosure and which is therefore where a saver is least protected. A bank offering an eye-catching yield for three or six months is not doing anything Regulation DD names. What Regulation DD does is govern the disclosure, and reading its definitions in order shows how little the promotion itself is constrained.

Start with the account types the regulation distinguishes. A stepped-rate account is "an account that has two or more interest rates that take effect in succeeding periods and are known when the account is opened", which is exactly a promotional rate with a disclosed go-to rate. A fixed-rate account is one where the institution contracts to give at least 30 calendar days' advance written notice of decreases in the interest rate. A variable-rate account is one where the rate may change after opening unless the institution has made that fixed-rate promise. Most promotional savings accounts are variable-rate accounts, and that classification is what decides everything that follows.

Then the disclosure duties, which are real. Account disclosures must state the annual percentage yield and the interest rate, using those terms, and for a fixed-rate account the period the rate will be in effect; for a variable-rate account they must state that the rate and yield may change, how the rate is determined, how often it may change, and any limit on the size of a change. An advertisement quoting a yield must state the period for which the yield is offered, or that it is accurate as of a specified date, along with the minimum balance required to obtain it and a statement that fees could reduce earnings.

And then the gap. 12 CFR 1030.5(a)(1) requires at least 30 calendar days' advance notice of a change to a disclosed term "if the change may reduce the annual percentage yield or adversely affect the consumer." But 12 CFR 1030.5(a)(2)(i) provides that no notice is required for "Changes in the interest rate and corresponding changes in the annual percentage yield in variable-rate accounts." Two other exceptions sit beside it, for check printing fees and for time accounts maturing in a month or less. So on an ordinary promotional savings account the bank owes you a month's warning before it raises a fee, and owes you nothing at all before it cuts the rate. The advertised yield is a statement about today, not a promise about next quarter, and the regulation is explicit that it need not be.

That is the honest frame for a promotional deposit offer, and it points at a practical test rather than a rule of thumb. The number that decides whether an offer is worth taking is the go-to rate, because the promotional period is the short part of the holding period, and even the go-to rate can be cut without notice. The high-yield savings account page covers what to look for in an ongoing rate and why moving money between leaderboard positions usually costs more effort than it returns.

What the three senses share, and it is not a legal feature. In every case the teaser is a customer-acquisition cost that the seller expects to recover from the relationship afterwards. That is not a criticism, it is the business model, and it tells you where to look: the disclosed terms describing what happens after the promotion are the terms that price the deal. On a card that is the go-to annual percentage rate. On a mortgage it is the index, the margin and the caps. On a savings account it is the go-to yield and the fact that it can move without notice.

The institution advertises the promotional rate with the disclosures its regulation requires, states the go-to terms in the account or loan paperwork, and applies the promotional rate for the stated period. When the period ends the go-to terms take over. On a mortgage the reset follows the loan's index and margin within its caps; on a card the disclosed go-to rate applies; on a deposit account the account simply pays the standard rate, which may itself have changed in the meantime without notice.

A hypothetical example on the deposit side, since that is the sense this page owns. The rates are illustrative rather than current market rates.

A bank advertises 5.00% for the first three months on a new savings account, reverting to its standard 0.40%. A second bank pays a flat 4.00% with no promotion. A saver has $20,000 to place for a year.

The promotional account pays $20,000 × 0.05 × 3 ÷ 12 = $250.00 during the promotion, then $20,000 × 0.004 × 9 ÷ 12 = $60.00 for the remaining nine months. Total for the year: $250.00 plus $60.00 = $310.00.

The flat account pays $20,000 × 0.04 = $800.00.

So the account advertising the higher headline number pays $800.00 minus $310.00 = $490.00 less over the year. Nothing in that comparison is hidden: both rates and both periods were disclosed. The arithmetic simply weights the go-to rate by nine months and the teaser by three, which is the weighting the disclosure makes possible and the advertisement never does for you.

Two refinements make the picture honest rather than tidy. First, the flat 4.00% is not guaranteed either. On a variable-rate account it can be cut with no advance notice, so this is a comparison of two current rates and not of two commitments. Second, a saver who intends to move the money out the moment the promotion ends can capture the $250.00 and go, and that is a legitimate plan provided the transfer actually happens, which is the assumption the offer is priced on.

Pros

• The saving or the payment relief during the promotional window is real money, and every term of the promotion has to be disclosed before you commit.
• On a card and on a deposit account the go-to rate is disclosed alongside the teaser, so the whole deal is visible at the outset to anyone who reads it.
• On a mortgage, Regulation Z forbids the lender from qualifying you on the discounted rate, which removes the specific abuse the teaser structure invited.
• A borrower with a genuinely short expected holding period, or a saver with a genuinely short parking horizon, may capture the promotion and never meet the reset.

Cons

• The headline rate applies to the short part of the term and the go-to rate to the long part, so ranking offers by the headline reliably picks the wrong one.
• On a variable-rate deposit account the rate can be cut with no advance notice at all, which means neither the promotional yield nor the go-to yield is a commitment.
• "Teaser rate" is not a legal category, so protections vary by product and guidance written about one product routinely misdescribes another.
• Capturing a promotion and moving on requires actually moving on, and the offer is priced on the expectation that most people will not.
• On a mortgage the reset is bounded by caps rather than by affordability, so the number to test against a household budget is the lifetime maximum rather than the teaser.