Posted: April 21st, 2016

An alternative type of mortgage is called a price level adjusted mortgageWho gains from this type of mortgage the homeowner or the bank or both?

An alternative type of mortgage is called a price level adjusted mortgage, which sets all mortgage payments and the principle amount of the mortgage in real rather than nominal terms. Thus, if the inflation rate was 10 percent in a certain year, the monthly payment would be increased by 10 percent in dollar terms, and the principal value of the mortgage loan also would be increased by 10 percent in dollar terms. Who gains from this type of mortgage the homeowner or the bank or both? Explain. Who bears the inflation risk?