What is an initial rate that is lower than the fully-indexed rate in an ARM transaction called?

The term used to describe an initial rate that is lower than the fully-indexed rate in an Adjustable Rate Mortgage (ARM) transaction is known as a teaser rate. Teaser rates are typically offered to attract borrowers by making initial payments more affordable. These rates are temporary and often designed to last for a specific period during the loan's early stages, after which the rate adjusts to the fully-indexed rate based on prevailing market conditions.

Teaser rates can be appealing to borrowers because they provide a lower initial payment, which can make it easier to qualify for a loan. However, understanding that this initial lower rate will eventually adjust to a higher, fully-indexed rate is essential for borrowers to accurately plan their finances for the future.

In contrast, reset rates refer to the adjustment that occurs at specified intervals based on market indices, while the base rate and stabilized rate concepts do not accurately reflect the temporary nature of an initial lower rate in an ARM scenario.