Variable-Payment Plan

Definition of Variable-Payment Plan

A Variable-Payment Plan is a type of mortgage repayment schedule that allows for the outstanding principal and interest rate to be adjusted periodically. The adjustments can occur due to various reasons:

The expiration of an interest-only period (e.g., Flexible Payment Mortgage).
A planned step-up in payments (e.g., Graduated Payment Mortgage).
Changes matching an interest rate index (e.g., Variable-Rate Mortgage).

With a Variable-Payment Plan, the monthly payments fluctuate over the life of the loan, making it crucial for borrowers to stay informed about potential changes.

Examples

Interest-Only Period Expiration
- A homeowner takes out a Flexible Payment Mortgage with a 5-year interest-only period. After this period, monthly payments increase to include both the interest and part of the principal.
Graduated Payment Mortgage
- A recent college graduate can afford smaller payments initially. They opt for a Graduated Payment Mortgage with payments that step up in predefined increments every two years.
Variable-Rate Mortgage
- A borrower selects a mortgage tied to an index. Each year, the interest rate is adjusted based on this index, causing the monthly payment to change accordingly.

Frequently Asked Questions (FAQs)

What is the primary benefit of a Variable-Payment Plan?

Variable-Payment Plans offer flexibility for borrowers who may anticipate fluctuating incomes or prefer lower initial payments. However, they also carry the risk of higher payments in the future.

How often do payment amounts get adjusted in a Variable-Payment Plan?

Adjustments can vary by loan type. For instance, a Variable-Rate Mortgage typically sees changes annually, while Graduated Payment Mortgages may adjust every few years based on agreed-upon increments.

Are Variable-Payment Plans suitable for everyone?

No, these plans are best for borrowers who can handle potential future payment increases. Those with stable incomes who prefer predictability might favor fixed-rate mortgages.

Flexible Payment Mortgage

A mortgage that allows the borrower to make smaller, interest-only payments for a set period before adjusting to include principal payments.

Graduated Payment Mortgage

A type of mortgage where payments start low and gradually increase at specified time intervals until they level out.

Variable-Rate Mortgage

A mortgage where the interest rate can change based on fluctuations in an underlying index. This causes the monthly payments to adjust accordingly.

Amortization

The process of spreading out a loan into a series of fixed repayments over time. With Variable-Payment Plans, amortization schedules can vary due to rate adjustments.

Online Resources

References

Mishkin, Frederic S. “The Economics of Money, Banking, and Financial Markets.” Pearson.
Brueggeman, William, and Fisher, Jeffrey. “Real Estate Finance and Investments.” McGraw-Hill Education.

Suggested Books for Further Studies

“Mortgage Markets and The Economy” by Richard L. Leftwich
“Principles of Real Estate Finance” by Charles A. Kindleberger
“The Handbook of Mortgage Banking” by James J. Clarke

Real Estate Basics: Variable-Payment Plan Fundamentals Quiz

### Which mortgage type allows for an interest-only period followed by a period of principal payments? - [x] Flexible Payment Mortgage - [ ] Fixed-Rate Mortgage - [ ] Balloon Mortgage - [ ] Reverse Mortgage > **Explanation:** A Flexible Payment Mortgage starts with an interest-only period, followed by increased payments that cover both interest and principal. ### During what time are payments typically adjusted in a Variable-Rate Mortgage? - [ ] Weekly - [ ] Monthly - [x] Annually - [ ] Biannually > **Explanation:** A Variable-Rate Mortgage usually has annual adjustments that align the interest rate with a specific index. ### What is a key risk associated with Variable-Payment Plans? - [ ] Payments decrease - [x] Payments increase - [ ] Fixing rates - [ ] Permanent low payments > **Explanation:** The key risk is that payments may rise significantly after adjustment periods, posing affordability issues for borrowers. ### Which type of borrower is ideally suited for a Graduated Payment Mortgage? - [x] A recent graduate expecting rising income - [ ] An elderly retiree - [ ] Someone looking for stable payments - [ ] An investor with a large capital > **Explanation:** Graduated Payment Mortgages suit individuals like recent graduates who expect to see their incomes rise over time. ### How does a Graduated Payment Mortgage typically adjust? - [ ] Monthly according to Libor rate - [ ] Unexpectedly based on lender discretion - [x] Predefined periodic increments - [ ] Expertise-dependent allocation > **Explanation:** A Graduated Payment Mortgage increases payments over time according to a predefined schedule set during loan origination. ### What characteristic is crucial for income-producing properties to qualify for depreciation? - [ ] Its color - [ ] Ownership by residents - [x] Income-generating purpose - [ ] Age > **Explanation:** The property must be income-producing to qualify for tax deductions via depreciation. ### When do Variable-Rate Mortgages typically tie their interest rates to an index? - [ ] Biweekly - [ ] Monthly - [ ] At the borrower's will - [x] Annually > **Explanation:** Adjustments to interest rates in Variable-Rate Mortgages are generally based on annual changes to an index. ### What can a Variable-Payment Plan help borrowers to initially achieve? - [x] Lower initial payments - [ ] Equal monthly payments - [ ] High immediate equity - [ ] Fully amortized loan > **Explanation:** Variable-Payment Plans often allow for lower initial payments which can ease the entry for borrowers. ### What essential factor should borrowers consider when opting for a Variable-Payment Plan? - [ ] Property color - [x] Future ability to afford higher payments - [ ] Fixed monthly expense - [ ] Reduced closing costs > **Explanation:** Borrowers should consider whether they can afford potential future increases in payments, as plans may not be suitable for everyone. ### Which is a potential advantage of a Flexible Payment Mortgage? - [ ] Fixed interest rates - [x] Temporary smaller payments - [ ] Writing off sudden loans - [ ] Set stable income regardless of index > **Explanation:** A flexible Payment Mortgage offers the advantage of smaller payments during the interest-only period.