TeachMeFinance.com - explain price-level-adjusted mortgage (PLAM)
price-level-adjusted mortgage (PLAM) -- a form of home loan in which payments are adjusted for inflation not by changing the interest rate but by changing the amount of outstanding principal. The loan is fully amortized, meaning the principal is repaid in a fixed number of years. Initial payments are low because the real rate of interest -- typically between 3 and five percent -- does not include a factor for inflation. Instead, inflation or deflation increases or decreases the amount of outstanding principal, and correspondingly, the amount of the monthly payment. The payment is adjusted each month based on a predetermined index, such as the Consumer Price Index. It is assumed that the value of the home and the borrower's income increases or decreases in tandem with fluctuations in the amount of unpaid principal. A PLAM offers monthly payments that are substantially lower and less volatile than mortgages with adjustable interest rates , while assuring the lender will be repaid all the principal, plus interest, plus whatever inflation eats away.
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