Mortgages have traditionally been a popular investment for financial institutions because of the great safety of such loans. During periods of rapidly rising prices, however, lenders may hesitate to tie up their money in mortgages. Interest rates soar during these periods of inflation, but most mortgages pay interest at a fixed rate throughout their term.
Thus, a lending institution that issues a 25-year mortgage at 8 percent interest may lose an opportunity to lend the money later at 12 percent. Inflation also drives down the purchasing power of money. As a result, the dollars that lenders get back have less buying power than the dollars they lent.
Therefore, in periods of inflation, many lending institutions charge an additional fee called points for granting a mortgage loan. Each point equals 1 percent of the amount of the loan. The fee is regarded as prepaid interest and must be paid when the mortgage is signed.

To counteract the effects of inflation, lending institutions have developed other types of mortgages. In a graduated-payment mortgage, the borrower makes lower monthly payments for the first few years and higher payments later. In a variable-rate or adjustable-rate mortgage, the interest rate rises and falls in relation to current interest rates. In a growing-equity mortgage, monthly payments increase between 3 and 7 percent yearly until the balance is paid. In a balloon-payment mortgage, payments are lower for the first few years and then a large single payment repays the remaining balance.