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 second mortgage?4 Views

00:00

Finance allah shmoop What is a second mortgage Okay you

00:07

know what a first mortgages it's otherwise cleverly named what

00:12

is called it is called oh yeah Mortgage it's Just

00:14

a loan on a house You paid four hundred grand

00:17

for this baby Hundred grand down two hundred fifty grand

00:19

in a first mortgage And they're still fifty grand You

00:23

owe well where's that fifty large coming from the bank

00:27

wouldn't loan you any more on a first mortgage that

00:30

was costing you six percent a year Tio you know

00:32

to rent that money So you had to get a

00:34

second mortgage which should things go awry and you become

00:40

a statistic Well that's it's fully behind the first mortgage

00:44

in the priority stack of payback So in a bankruptcy

00:48

situation the first mortgage first what's called a first mortgage

00:52

get it fully paid along with any fees associated with

00:55

it and back interest accrued and any other things that

00:59

are associated with that first mortgage it stands in line

01:02

first in priority Then any cash leftover gets attributed to

01:07

that second mortgage So not surprisingly second mortgage money costs

01:13

a lot more to rent then first mortgage money because

01:16

the risk of non payment in a bad situation is

01:20

meaningful E higher especially when the borrowed does this for 00:01:25.136 --> [endTime] a living

Up Next

Finance: What is a Mortgage?
345 Views

What is a mortgage? A mortgage is a loan on property. Obviously not many individuals, or companies for that matter, can or want to pay cash for the...

Finance: What is Interest Only Mortgage?
17 Views

An interest-only mortgage is a mortgage on which you only pay the rent on money borrowed, rather than on the principal.

Finance: What are the components of a mortgage payment?
1 Views

What are the components of a mortgage payment? Mortgage payments generally consist of (4) components acronymed as PITI: Principal, Interest, Taxes,...

Find other enlightening terms in Shmoop Finance Genius Bar(f)