The Concise Encyclopedia of Economics defines hyperinflation as a state in which the monthly inflation rate rises more than 50 percent. This rise in inflation rates can cause the value of mortgage loans to plummet.
When inflation occurs, the value of a unit of currency decreases; as a result, it takes more of that currency to buy a certain product than it did a short time ago. In these circumstances, loans that receive a fixed cash flow devalue greatly.
If a homeowner holds a fixed-rate mortgage, he must continue to make regular payments to the lender at a fixed amount. Under hyperinflation, the loan will become almost worthless. However, if the mortgage is an adjustable-rate mortgage, the payment amount will rise in keeping with a financial index, allowing the loan to keep its value.
When Zimbawe experienced runaway inflation in 2008, many mortgages became all but worthless. Lenders and property holders sought to denominate mortgages in foreign currency to assure their continued value.
- Photo Credit neighborhood homes image by Wendi Evans from Fotolia.com
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