What is a Price Level Adjusted Mortgage (PLAM)?
A price level adjusted mortgage (PLAM) is a mortgage with a fixed interest rate but an adjustable principal balance.
How Does a Price Level Adjusted Mortgage (PLAM) Work?
For example, let's assume you take out a traditional 30-year, $100,000 mortgage at 7%. Your monthly payment would be about $665 per month for the life of the loan.
Now let's consider a PLAM. In this situation, the lender would first offer you a much lower rate (say, 3%). Your 30-year, $100,000 PLAM at 3% would mean a monthly payment of only about $422.
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.
Adjustments are typically based on movements in the Consumer Price Index (CPI). This, of course, means that in a deflationary economy, the borrower's payments would go down.
Why Does a Price Level Adjusted Mortgage (PLAM) Matter?
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.