Renegotiated-Rate Mortgage (RRM)

What is a Renegotiated-Rate Mortgage (RRM)?

A Renegotiated-Rate Mortgage (RRM) is a specific type of mortgage loan wherein the interest rate is subject to adjustments at selected times according to predefined terms. Unlike Adjustable-Rate Mortgages (ARMs) which are tied to market indices, the rate changes in RRMs occur without reference to economic indices, offering borrowers clarity about when changes will occur.

Key Characteristics

Rate Adjustments: The interest rate on an RRM is revised at preset intervals which might be every year, every three years, or every five years.
Fixed Intervals Without Index Reference: Adjustments are made based on an agreement between the lender and the borrower and are not tied to an external index.
Predictability: Offers some level of predictability about when the rate changes will occur, though the exact new rates may not be known until renegotiation.

Examples of Renegotiated-Rate Mortgages

Example 1: A homeowner takes out an RRM with a lender where the interest rate is adjusted every two years. On the second anniversary of the loan, the lender and borrower meet to renegotiate the new interest rate based on current lending conditions but not using any established economic indices.
Example 2: An initial rate is set for five years on an RRM. At the end of five years, the interest rate is renegotiated for the next interval, and this process continues throughout the loan period.

Frequently Asked Questions

What makes an RRM different from an ARM?

An RRM’s interest rate adjustments are based on a set schedule agreed upon by the lender and borrower and do not rely on economic indices, whereas an ARM’s rate changes are tied directly to an external index such as the LIBOR.

How often can the rate on an RRM be adjusted?

The adjustment intervals are defined at the time of the loan origination. Common periods include annual, three-year, and five-year intervals.

Are RRMs common in the mortgage market?

RRMs are less common compared to fixed-rate mortgages and ARMs. They may be utilized in markets where borrowers and lenders prefer predefined renegotiation periods rather than index-tied adjustments.

What are the benefits of an RRM?

The major benefits are predictability regarding adjustment periods and potentially reduced interest rates compared to a fully fixed-rate mortgage.

Can the renegotiated rates increase significantly?

Potentially, yes. The newly renegotiated rate depends on the current lending environment and agreement between the borrower and lender. Rates can rise or fall, unlike fixed-rate mortgages.

Hybrid Mortgage: A mortgage that combines features of both fixed-rate and adjustable-rate mortgages. Often includes a fixed-rate period after which the rate may adjust periodically.
Adjustable-Rate Mortgage (ARM): A mortgage in which the interest rate changes periodically based on an economic index that the loan’s interest rate is tied to.
Fixed-Rate Mortgage: A mortgage with a fixed interest rate for the entire term of the loan.
Interest-Only Mortgage: A mortgage where, for the initial period of the term, the borrower pays only the interest on the loan.

Online Resources

References

Brueggeman, William B., and Jeffrey Fisher. Real Estate Finance and Investments. McGraw Hill Education, 2011.
Geltner, David, et al. Commercial Real Estate Analysis and Investments. OnCourse Learning, 2013.

Suggested Books for Further Studies

Reed, Edward and Kenneth Reeder. Introduction to Mortgage Financing. HarperCollins Publishers,1995.
Goldberg, Deborah C. Real Estate Finance: Theory and Practice. Oxford University Press, 2007.
Fabozzi, Frank J. The Handbook of Mortgage-Backed Securities. McGraw Hill Professional, 2006.

Real Estate Basics: Renegotiated-Rate Mortgage (RRM) Fundamentals Quiz

### How is the interest rate adjusted on a Renegotiated-Rate Mortgage (RRM)? - [x] At predetermined intervals, based on negotiation between borrower and lender. - [ ] Based on economic indices such as LIBOR. - [ ] It remains fixed for the life of the loan. - [ ] Daily according to market conditions. > **Explanation:** The interest rate on an RRM is adjusted at predetermined intervals and the new rate is agreed upon by the borrower and lender, independent of economic indices. ### For an RRM, what typically happens when the rate adjustment is due? - [x] The interest rate is renegotiated and set for the next period. - [ ] The borrower chooses a new loan product. - [ ] The rate automatically drops by default. - [ ] The borrower must refinance the loan. > **Explanation:** When the rate adjustment is due, the borrower and lender renegotiate the interest rate which will be applied for the next interval. ### What factor is *not* considered when determining the new rate during renegotiation? - [ ] Current lending conditions - [x] Economic indices like LIBOR - [ ] Borrower’s creditworthiness - [ ] Lender's present lending policies > **Explanation:** RRMs do not rely on economic indices like LIBOR when determining the new rate during renegotiation. ### When might a borrower prefer an RRM over an ARM? - [ ] The borrower wants a rate based on market indices. - [x] The borrower prefers predictable rate adjustment intervals. - [ ] The borrower wants an interest-only payment period. - [ ] The borrower prefers a very short loan term. > **Explanation:** A borrower might prefer an RRM for its predictable rate adjustment intervals, which are predefined. ### What type of mortgage combines fixed-rate and variable-rate features similar to RRM? - [ ] Interest-Only Mortgage - [ ] Fixed-Rate Mortgage - [ ] Balloon Loan - [x] Hybrid Mortgage > **Explanation:** A Hybrid Mortgage includes features of both fixed-rate and adjustable-rate periods, similar to how an RRM works but is more commonly indexed. ### Are interest rates on RRM tied to any specific index? - [ ] Yes, they are tied to the stock market index. - [ ] Yes, they are tied to inflation rates. - [x] No, they are renegotiated based on agreement criteria. - [ ] Yes, they are tied to government bond yields. > **Explanation:** RRM rates are renegotiated based on specific agreements between the lender and borrower and are not tied to any indices. ### Which is a key benefit of an RRM? - [ ] It provides a completely fixed rate. - [ ] It offers daily rate adjustments. - [x] It allows for predictable renegotiation intervals. - [ ] It is based on a global economic index. > **Explanation:** The key benefit of an RRM is the predictability in the timing for rate adjustments, even if the new rate levels are unknown until renegotiation. ### Can the rate on an RRM decrease upon renegotiation? - [x] Yes, depending on current lending conditions. - [ ] No, it can only increase. - [ ] No, it stays the same. - [ ] Yes, but tied to the borrower's previous rate. > **Explanation:** The rate can decrease if the renegotiated terms favor lower rates based on current lending conditions at the time of adjustment. ### Which type of mortgage typically relies heavily on economic indices for rate adjustments? - [ ] Fixed-Rate Mortgage - [ ] Balloon Mortgage - [ ] Interest-Only Mortgage - [x] Adjustable-Rate Mortgage (ARM) > **Explanation:** Adjustable-Rate Mortgages (ARMs) commonly rely on economic indices for their rate adjustments. ### What might be a challenge when securing an RRM? - [ ] Complex calculations involving multiple indices. - [x] Must renegotiate terms regularly. - [ ] Rigidity in loan terms. - [ ] Short-term loan periods only. > **Explanation:** A potential challenge with RRMs is the need to regularly renegotiate terms, which can require time and repositioning depending on market dynamics.