Alternative Mortgage Instruments

• Graduated Payment Mortgages (GPMs)

• Price Level Adjusted Mortgages (PLAMs)

• Adjustable Rate Mortgages (ARMs)

• Reverse Annuity Mortgages (RAMs)

• Shared Appreciation Mortgages (SAMs)

Alternative Mortgage Instruments

Graduated Payment Mortgage

• Fixed Contract Rate

• Fixed Loan Term

• Payments Increase During First Few Years

• Payments Known in Advance

• Permit Negative Amortization

 Alternative Mortgage Instruments

Graduated Payment Mortgage

Loan = $100,000
Rate = 12%
Term = 30 years with monthly payments;
payment increases 7.5% per year for first five years

Year Monthly Monthly Ending

Payment Interest Balance
1 $ 791.38 $ 1,000.00 $ 102,645.82
2 850.73 1,026.46 104,874.52
3 914.54 1,048.75 106,576.64
4 983.13 1,065.77 107,624.72
5 1,056.86 1,076.25 107,870.63
6-30 1,136.13
 Alternative Mortgage Instruments
Price Level Adjusted Mortgage

For a fixed payment mortgage, the contract rate of interest, CR, is:

CR = rf +  + inf

where rf = risk free rate

 = risk premium
inf = expected inflation rate

With a Price Level Adjusted Mortgage (PLAM),

CR = rf + 

and the outstanding mortgage balance is indexed to the price level

to compensate the lender for inflation.
 Alternative Mortgage Instruments

Price Level Adjusted Mortgage

Loan = $100,000
Rate = 5%
Term = 30 years with monthly payments
Inf = 5%, 6%, and 4%

Year Beginning Monthly Ending Balance

Balance Payment Before After
1 $ 100,000.00 $ 536.82 $ 98,524.34 $ 103,450.55
2 103,450.55 563.66 101,821.99 107,931.31
3 107,931.31 597.48 106,116.98 110,361.66
 Alternative Mortgage Instruments

Adjustable Rate Mortgages

• Contract Rate Indexed to Lender’s Cost of Funds (plus a margin)

• Term May Adjust

• Monthly Payment May Adjust

• Negative Amortization May be Permitted

• Typically Have Periodic and Lifetime Interest Rate Caps

 Alternative Mortgage Instruments
Adjustable Rate Mortgages

Loan = $100,000
Initial Rate = 9%
Term = 30 years with monthly payments
Index = Yields on 1-Year Treasury Securities ( 8%, 9%, 7%)
Margin = 2.5%
Caps = 2/5—200bp annual cap and 500bp lifetime cap

Year Beginning Interest Rates Monthly

Balance Market Contract Payment
1 $ 100,000.00 9.0% 9.0% $ 804.62
2 99,316.84 11.5% 11.0% 950.09
3 98,815.85 9.5% 9.5% 841.79
 Alternative Mortgage Instruments
Reverse Annuity Mortgages

The borrower:

• receives the loan in periodic installments

• repays the loan in one lump sum at the end of the term

The monthly RAM receipt on a 10 year, $50,000, 8% annual interest rate

RAM is $273.30. The borrower will recieve 120 of these monthly
payments. At the end of the loan term, the borrower will repay the lender
$50,000.
Principal = 120 x $ 273.30 = $ 32,796.56
Interest = $50,000 - 32,796.56 = $ 17,203.44
 Alternative Mortgage Instruments
Shared Appreciation Mortgages

The lender provides the borrower with:

• a below market rate of interest, or
• cash to pay a portion of the down payment,
• or both

In exchange for a share of the property value appreciation during the

hoding period.