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What is a Dual-Index Mortgage?
Similar to an adjustable-rate mortgage, the dual-index mortgage (or "DIM") depends on not one, but two fluctuating indexes-wage rates and interest rates-to determine the loan balance and payment amounts.
  • advantages: The DIM can help a borrower maintain a stable debt-to-income ratio. If the economy is doing well and wages are high, the borrower can pay off the mortgage in a shorter period of time. The borrower can also set up a DIM with a very small initial payment.

  • disadvantages: Borrowers end up paying more interest in the long run since the initial low monthly payments are not enough to pay the monthly interest, resulting in negative amortization (where the loan actually grows, even though payments are being made). In this situation, the interest payments that cannot be covered are capitalized or added to the principal of the loan.

    The interest ends up being added to the principal (which in turns increases the amount of interest paid). Negative amortization can also occur if interest rates rise faster that wages.

    These instruments have been primarily used to make real estate transactions outside of the United States. Most notably, in Mexico.

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