A mortgage is a loan used to purchase a property. The property serves as collateral for the loan, and the loan is considered repaid once the agreed-upon terms are fulfiled. There are various types of mortgages, including adjustable-rate mortgages, which have fluctuating interest rates, and fixed-rate mortgages, which have a consistent interest rate. A price-level-adjusted mortgage is a specific type of fixed-rate mortgage that adjusts the principal balance to account for inflation. Consequently, the amount owed may increase or decrease based on the inflation rate.
A price-level-adjusted mortgage is a mortgage where the interest rate remains fixed, but the principal balance is adjusted to account for inflation. This means that as the cost of living rises, the amount owed on the mortgage also increases. For instance, if someone obtains a price-level-adjusted mortgage for $100,000 with a 5% interest rate and there is a 2% inflation rate, the principal balance would grow to $102,000 after one year. This arrangement safeguards the lender from inflation while preventing the borrower from being burdened with an unmanageable debt. Although not very common, price-level-adjusted mortgages can be beneficial for borrowers seeking protection against inflation and lenders aiming to ensure repayment in real dollars.
A Price-Level-Adjusted Mortgage (PLAM) is a type of mortgage loan where the principal and interest payments are adjusted based on changes in the price level or inflation rate.
Unlike a traditional fixed-rate mortgage, a PLAM adjusts the principal and interest payments periodically to account for inflation. This means that the borrower’s monthly payments may increase or decrease over time.
The purpose of a PLAM is to protect both the lender and the borrower from the effects of inflation. By adjusting the payments based on changes in the price level, the lender can ensure that the real value of the loan is maintained, while the borrower can avoid being burdened by rapidly increasing payments.
The frequency of payment adjustments in a PLAM can vary depending on the terms of the loan agreement. Typically, adjustments are made annually or every few years to reflect changes in the price level.
The payment adjustments in a PLAM are calculated using an inflation index, such as the Consumer Price Index (CPI). The lender applies the percentage change in the index to the outstanding loan balance to determine the new payment amount.
Yes, the payments in a PLAM can decrease if there is deflation or a decrease in the price level. In such cases, the borrower may benefit from lower monthly payments.
PLAMs may not be suitable for everyone. Borrowers who prefer stable and predictable payments may opt for traditional fixed-rate mortgages. PLAMs are more suitable for individuals who want to protect themselves from inflation or anticipate a decrease in the price level.
PLAMs may have slightly higher interest rates compared to traditional mortgages due to the inflation protection they offer. However, the overall cost will depend on various factors, including the loan terms, prevailing interest rates, and inflation expectations.
Yes, it is possible to refinance a PLAM. However, the terms and conditions of the new loan will depend on the prevailing market conditions and the lender’s policies.
If you cannot afford the increased payments in a PLAM, you should contact your lender immediately to discuss your options. Depending on the terms of the loan agreement, the lender may be able to offer alternative solutions, such as extending the loan term or modifying the payment schedule.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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