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 Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
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