| Mortgage Instruments |
- Fixed Rate Mortgages: a mortgage with an interest rate that remains constant for the life of the loan. The most common fixed-rate mortgage is repaid over a period of 30 years; 15-year fixed-rate mortgage is also available.
- Principal; Interest
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| Adjustable Mortgage Rate (ARM) |
- Mortgage where the interest rate adjusts periodically up or down through a set index.
- The basic concept of ARM is to allow the rate of interest on the loan to move with the market rate.
- This reduces the interest rate risk faced by the lender by shifting it to the borrower.
- However, lenders require lower rates initially, and there are provisions limiting the amount by which the rate or payments can change.
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| Graduated-Payment Rate |
- Same as fixed-rate mortgage but the payments are rearranged to be lower at the beginning of the loan and higher at the end.
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| Price Level Adjusted Mortgages (PLAM) |
- Designed to protect lenders from unexpected inflation risk.
- In this loan, the mortgage rate breaks down to two components: contract interest rate and inflation rate.
- Borrowers pay at the contract rate plus inflation rate.
- Lenders usually offer lower rates.
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