BROWSE

Rate-Improvement Mortgage

Home Ownership by Country


What is 'Rate-Improvement Mortgage'

A type of fixed-rate mortgage, which contains a clause that entitles the borrower to reduce the fixed-interest-rate charge on the mortgage once, and early in the mortgage. The option will be exercised when interest rates fall lower then the borrowers initial mortgage rate.

There is typically a fee associated with exercising this option, and the initial mortgage might have a higher-than market-interest rate and/or high costs. However, the rate reduction option could save the borrower the costs of refinancing which might be more then the cost of using their rate improvement option.

Explaining 'Rate-Improvement Mortgage'

There is no "free lunch" in the world of finance. A borrower who is told that they are being "given" the option to reduce their interest rate for a minimal fee should be aware that the lender has the true cost of that option priced in the transaction somewhere.

That's not to say the option is not fairly priced and could be valuable to the borrower should interest rates fall. The borrower should simply have a good understanding of the costs, risks and benefits of paying for the option in the initial transaction.


Further Reading


A Comparison of Conventional and Rate Reduction Option MortgagesA Comparison of Conventional and Rate Reduction Option Mortgages
heinonline.org [PDF]
… V. Summary In this paper we have examined the relative merits of the reduction option loan (ROL) and the rate improvement mortgage (RIM) to the conventional mortgage … Valuing the mortgage borrower's prepayment option … Pricing mortgages: An options approach …

Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures?Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures?
papers.ssrn.com [PDF]
… V. Summary In this paper we have examined the relative merits of the reduction option loan (ROL) and the rate improvement mortgage (RIM) to the conventional mortgage … Valuing the mortgage borrower's prepayment option … Pricing mortgages: An options approach …

Model stability and the subprime mortgage crisisModel stability and the subprime mortgage crisis
link.springer.com [PDF]
… V. Summary In this paper we have examined the relative merits of the reduction option loan (ROL) and the rate improvement mortgage (RIM) to the conventional mortgage … Valuing the mortgage borrower's prepayment option … Pricing mortgages: An options approach …

ARM funds for safety and yieldARM funds for safety and yield
go.gale.com [PDF]
… V. Summary In this paper we have examined the relative merits of the reduction option loan (ROL) and the rate improvement mortgage (RIM) to the conventional mortgage … Valuing the mortgage borrower's prepayment option … Pricing mortgages: An options approach …

Security of organizational changes via operational integration: ensuring methodologySecurity of organizational changes via operational integration: ensuring methodology
er.knutd.edu.ua [PDF]
… V. Summary In this paper we have examined the relative merits of the reduction option loan (ROL) and the rate improvement mortgage (RIM) to the conventional mortgage … Valuing the mortgage borrower's prepayment option … Pricing mortgages: An options approach …

A'Backdoor'Approach to Highest and Best Use AnalysisA'Backdoor'Approach to Highest and Best Use Analysis
search.proquest.com [PDF]
… V. Summary In this paper we have examined the relative merits of the reduction option loan (ROL) and the rate improvement mortgage (RIM) to the conventional mortgage … Valuing the mortgage borrower's prepayment option … Pricing mortgages: An options approach …


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