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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 …



Q&A About Rate-Improvement Mortgage


What are some other forms of mortgages?

Other forms of mortgages include interest only mortgages, graduated payment mortgages, variable rate mortgages (including adjustable-rate mortgages and tracker mortgages), negative amortization mortgages, and balloon payment mortgages. Unlike many other loan types, FRM interest payments and loan duration is fixed from beginning to end.

How does one exercise their option to reduce their interest rate?

The borrower exercises this option by paying a fee.

What is a rate-improvement mortgage?

A rate-improvement mortgage (also known as an adjustable-rate mortgage) is a fully amortizing loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float".

What is a 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.

Are there any risks associated with exercising an option like this?

Yes, there are risks associated with exercising an option like this.

What is usually included in the initial mortgage's higher-than market interest rate and high costs?

The initial mortgage might have a higher than market interest rate and/or high costs. However, the reduction in interest rates could save you from having to refinance your loan at a later date which could be more expensive than using your reduction in interest options. There is no "free lunch" in finance! A borrower who is told that they are being "given" an opportunity to reduce their interests should be aware that lenders have priced these opportunities into transactions somewhere along with other fees and charges associated with mortgages such as application fees, title insurance, etc.. That's not say that it isn't fairly priced or valuable but borrowers should understand what they're paying for when making decisions about financing options. Borrowers should also know what they're getting themselves into before signing on any dotted line! They need to understand all of the costs involved including closing costs when comparing different types of loans available today including conventional loans versus government insured loans such as FHA or VA loans versus private sector products offered by banks or credit unions."

Why would someone want to pay for this option?

Someone might want to pay for this option if they believe interest rates will fall.

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