Dual Index Mortgage

DEFINITION of 'Dual Index Mortgage'

A type of mortgage where the interest rate paid on the outstanding balance is indexed to a interest rate benchmark plus a margin, and the actual total mortgage payments are linked to a benchmark of wages and salaries for workers in a given economy or region. The initial mortgage payment is set at a certain level and rises or falls according to the wage and salary index.

The rate at which payments increase or decrease can differ substantially from the rate at which the actual interest rate on the mortgage rises or falls. When the payment is less than a calculated interest-only payment, based on the interest rate of the mortgage, negative amortization is created.

BREAKING DOWN 'Dual Index Mortgage'

Dual index mortgages do not exist in the United States, but are popular in Mexico and other Latin American countries which historically have suffered from high levels of inflation. This type of mortgage allows borrowers to purchase homes when there is a large level of inflationary risk.

However, dual index mortgages are similar in principal to payment-option adjustable-rate mortgages (ARMs), which are popular in high cost areas of the United States. Like dual index mortgages, payment option ARMs offer the borrower initial monthly payments with the potential for negative amortization.