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.