Dual Index Mortgage
  
If you like your financial obligations married to complicated mathematical machinations, then the dual index mortgage is your dream.
Some mortgages have variable interest rates. Instead of paying 5% a year for the length of a 30-year mortgage, the interest rate moves around depending on what some other benchmark does. Most of the time, these variable rates follow a single benchmark...something like inflation or the prevailing interest rate.
So...you sign up for a mortgage that starts at 5% a year. After five years, it adjusts based on the prime rate. Rates have climbed since you signed the deal, so now the rate you pay gets adjusted upwards to 7%.
Two years down the line, rates have fallen significantly, and your mortgage rate falls with it. Now you're paying just 4%. And so on. Your rate adjust based on some index...in this case, an index tracking prevailing interest rates.
The dual index mortgage has two measures that determine where your rate goes. One of these tracks the prevailing rate, responding to an index that measures the benchmark interest rate in the economy, plus a little margin for the bank to secure a profit.
The second index usually tracks some wage benchmark. It looks at how worker salaries are holding up in the economy and bakes that into the mortgage rate as well.
Think of it like the devil and angel on the shoulder thing. On the one side, you've got an index looking out for the bank. The mortgage rate won't get too far away from the current interest rate, so the bank is always making money on the deal. On the other shoulder, you've got an index looking out for salaries. Theoretically, with this benchmark in play, the payments won't get too far away from your ability to pay. Hopefully. Pray to the angel on your shoulder.
Related or Semi-related Video
Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
Up Next
An interest-only mortgage is a mortgage on which you only pay the rent on money borrowed, rather than on the principal.
What's a second mortgage? Easy: it comes after a first mortgage. Hit play for more details.
What are the components of a mortgage payment? Mortgage payments generally consist of (4) components acronymed as PITI: Principal, Interest, Taxes,...