Question:

What is a dual index mortgage?

Answer:

The dual index mortgage does not exist in the United States. It is a popular mortgage tool in Mexico and Latin America where inflation can reach very high levels. It is a mortgage very similar to adjustable rate mortgages.

Compared to ARMs, the DIM (dual index mortgage) is tied to a wages index for a certain area. In the same way as ARMs, the dual index mortgage rates goes up or down according the inflation index, but the borrowers are required to make a minimum payment to the lender. The government insures the DIMs, otherwise the risk for lenders is way too big.

Dual index mortgage loans can result in negative amortization (that is, additional unpaid interest is added to the principal and interest is accrued on interest).

Example of a Mexican Dual Index Mortgage

A Mexican worker has a dual index mortgage and pays 6% to the lender. At the same time, inflation rates are 18%. The rate of the DIM loan is adjusted according to inflation rates, but the borrower makes interest only payments at 6%; the borrower's payment is tied to the wages index. The difference is accrued at the principal and the expectations are at a certain point the principal will begin to decrease. However, the salary index needs to reach inflation rates, or loan will have outstanding balance at the end of the term. Weren't it for Mexican government guaranty, lenders would have to be taking tremendous risk.

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