Price Level Adjustable

Mortgage `PLAM`
IMPRINTED BY Department: FBA
Md. Tamim Hossain, Program: BBA

A Student of FIU Id: 18201006

Spring 2k19, April 24th

 Out-comes !

Understand Price level

Adjustable Mortgage
Positive Effects, Problems and
Applications of PLAM
 Inflation & Rate
 Inflation is a sustained increase in the general price level of
goods and services in an economy over a period of time.

 The measure of inflation is the inflation rate, the annualized

percentage change in a general price index, usually
the consumer price index, over time.
 What is PLAM?

 This is a variable rate mortgage instrument in which the ending

balance is periodically adjusted with inflation. The Adjustment
frequency is usually once a year or every month.

 More precisely, PLAM is a graduated-payment home loan where

the principal adjusts for inflation.
 Difference(s)
 Under many adjustable-rate mortgages (ARMs), the bank or
lender will leave the homebuyer’s unpaid principal fixed but will
adjust the rate of interest on the loan based on key market
indices.

 In contrast to PLAM, the bank or lender will not change the

interest rate but will revise the homebuyer’s outstanding
principal based on a broader inflation rate.
 Process
 Before opening the price level adjustable mortgage (PLAM), the
homebuyer and lender will reach agreement on how often the
lender is to make inflation adjustments.

 The lender makes these adjustments based on the movements

of an appropriate price index, such as the Consumer Price
Index (CPI).
 Positive Effects
 Interest rate at a consistently low level for the duration of the
loan.

 This low-rate consistency helps to make the mortgage affordable

at all stages.

 The lender will never hike the loan’s interest rate.

 Positive Effects

 The lender benefits from being able to raise the loan balance
based on inflation increases.

 Inflation affects virtually all prices in an economy.

 Inflation would slowly erode the value of the mortgage

payments which the lender receives from the borrower.
 Problems

 Borrowers have less predictable payments.

 As inflation sends the unpaid principal higher, the bank will

revise the borrower’s monthly payment upward.

 Ever changing mortgage payments make harder to plan and

budget expenses.

 PLAMs are less suited to borrowers living on a fixed income.

 Applications

 For example, let's assume you take out a traditional 30-year,

$100,000 mortgage at 7%. Your monthly payment would be
about $665 per month for the life of the loan.
 Applications

 Now let's consider a PLAM. In this situation, the lender would

first offer you a much lower rate (say, 3%). Your 30-year,
$100,000 PLAM at 3% would mean a monthly payment of only
about $422.

 Adjustments are typically based on movements in the Consumer

Price Index (CPI). This conclude that in a deflationary economy,
the borrower's payments would go down.
 Why it Matters ?
 PLAMs allow lenders and borrowers to structure a deal whereby
the borrower receives a consistent, low interest rate throughout
the life of the loan and
 the lender is able to participate indirectly in the rising value of
the home and thus protect against inflation's erosion on the
payments it receives from the borrower.
 Borrowers living on fixed incomes are typically poor candidates
for PLAMs because continued, consistent inflation means ever-
increasing monthly payments.
Thank you