RE-160 Lecture Notes - Lecture 32: Interest Rate Risk, Mortgage Loan, Price Level

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Represents an example of new mortgage instruments introduced by lenders to mitigate the effect of inflation on mortgage interest rates. The objective of gpm is to provide for a series of mortgage payments that are lower in the initial years of the loan than they would be with a standard mortgage loan. Gpm payments then are gradually increased at a predetermined rate as borrower incomes are expected to rise over time. The tilt effect is thus offset to some extent and reduces the burden to households. In the early years gpm payments were lower than those of cpm. However gpm payments must eventually exceed the level payment on the cpm loan to make up for the lower payments on the gpm in the early years. Advantages of gpm: initial payment levels are significantly lower, in the early years payment corresponds more closely to an increase in the borrower"s income, outstanding loan balances under gpm.

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