Definition: The current rate mortgage refers to a type of mortgage where the interest rate is determined by an index, typically 12 months. This means that the interest rate changes every twelve months, based on the overall market condition. The purpose of this mechanism is to provide liquidity and stability for borrowers, as well as to help stabilize home prices. The term "current rate mortgage" has been around since the 90s, when it was first introduced as a way to encourage lending by offering lower interest rates in exchange for higher risk-taking by the borrower. This strategy was intended to reduce the need for banks to hold excess reserves and allowed for more flexible financing options. The term "current rate mortgage" has been replaced with "fixed-rate mortgage," which is a type of mortgage that does not change its interest rate based on market changes. Fixed-rate mortgages are often used by homeowners who want to maintain their income stability or to avoid the volatility associated with variable-rate loans. Overall, the current rate mortgage mechanism allows borrowers to benefit from lower interest rates while providing some degree of security in exchange for risk taking.
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