What Is a Price Level Adjusted Mortgage (PLAM)?
A price level adjusted mortgage (PLAM) is a graduated-payment home loan. The principal adjusts for inflation. Under this unique type of mortgage, the bank or lender will not change the interest rate but will revise the homebuyer’s outstanding principal based on a broader inflation rate that is derived from a price index.
Most mortgages have adjustable interest rates that vary based on fixed interest rates or certain market indexes. With these conventional mortgages, the balance remains fixed. However, with price level adjusted mortgages, the interest remains fixed but the outstanding principal balance fluctuates.
- With a price level adjusted mortgage (PLAM), the bank or lender revises the homebuyer’s outstanding principal based on a broader inflation rate that is derived from a price index.
- With a price level adjusted mortgage (PLAM), lenders receive back the loan principal, a determined interest amount, and an additional price that covers the cost of inflation.
- Before opening the price level adjusted mortgage (PLAM), the homebuyer and lender will reach an agreement on how often the lender is to make inflation adjustments; in most cases, adjustments happen monthly.
- Price level adjusted mortgages (PLAMs) are not suited to borrowers living on a fixed income.
How a Price Level Adjusted Mortgage (PLAM) Works
With a price level adjusted mortgage (PLAM), lenders receive back the loan principal, a determined interest amount, and an additional price that covers the cost of inflation. Under normal economic conditions, inflation causes the original value of a home to increase over time. This gradual climb can be significant if it happens over the course of a decades-long mortgage.
Increases in home equity, or the value of the homeowner’s interest in their home, will usually offset the home's value rise. In other words, it is the real property’s current market value less any liens which are attached to that property.
Under many adjustable-rate mortgages (ARMs), the lender will leave the homebuyer’s unpaid principal fixed but will adjust the rate of interest on the loan based on key market indices. Under a PLAM, the lender essentially reverses that equation. They will leave the interest rate alone but adjust the homebuyer’s unpaid principal periodically based on the rate of inflation.
Before opening the price level adjusted mortgage (PLAM), the homebuyer and lender will reach an agreement on how often the lender is to make inflation adjustments. In most cases, adjustments happen monthly. The lender makes these adjustments based on the movements of an appropriate price index, such as the Consumer Price Index (CPI).
Advantages and Disadvantages of a Price Level Adjusted Mortgage (PLAM)
A price level adjusted mortgage offers advantages to both the homebuyer and the lender. The homebuyer can benefit from keeping their 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.
Since the lender doesn’t incorporate expected inflation increases in the mortgage structure up front, the borrower starts out with a lower interest rate and lower monthly mortgage payments than they would find on many conventional mortgages. Also, the borrower will not have to contend with a sudden substantial mortgage increase later on because the lender will never hike the loan’s interest rate.
The lender benefits from being able to raise the loan balance based on inflation increases. Over time, inflation affects virtually all prices in an economy. Otherwise, and especially on mortgages which span decades, inflation would slowly erode the value of the mortgage payments which the lender receives from the borrower. As the value of the mortgaged house increases and the note remains static, the lender sees less profit from the loan.
One disadvantage of PLAMs is that borrowers have less predictable payments. Whenever inflation sends the unpaid principal higher, the bank will revise the borrower’s monthly payment upward as well. This change means homeowners with a PLAM face the prospect of slight monthly increases to their payments for the life of the loan. Having variable mortgage payments can make it harder for homeowners to plan and budget expenses. For this reason, PLAMs are less suited to borrowers living on a fixed income.