Price Level Adjusted Mortgage (PLAM)
What it is:
How it works/Example:
Under a PLAM, however, the monthly payments may change based on inflation adjustments to the outstanding principal. Thus, the $422 payment will likely not be the same each month, and they may consistently increase over the life of the loan if inflation increases over the life of the loan. The borrower and the lender agree on how frequently the principal is adjusted for inflation, though typically it occurs every month.
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.