What are graduated payment mortgages?

Julie Garton-Good writes in her 2008 book "All About Mortgages":

A graduated payment mortgage (GPM) is a loan where the payment graduates annually for a predetermined period and then becomes fixed for the duration of the loan. During times of high-rate interest, borrowers use them as leverage to be able to more readily qualify (because the initial payment was less). But the downside is that even though the initial payment is less, the interest owed is now — and the payment shortfall in the early years is added back onto the loan, which can result in negative amortization.

The FHA insures GPMs. The FHA offers plans that vary in annual payment increases and number of years over which payments can increase.

You can save considerable money by making your mortgage payments every two weeks.

For a loan cast as a biweekly mortgage, a buyer who misses just one payment in a two-week period would potentially be in default. Also, most lenders require that payments be automatically withdrawn from the borrower’s checking account.

Louie Latour writes:

Graduated Payment Mortgages are loans that start with low monthly payments that gradually increases at regular intervals. This type of mortgage is perfect for the self employed or any homeowner that expects their future income to increase steadily.

These loans are a type of hybrid mortgage that offer fixed interest rates on a graduated repayment schedule. If you are looking at an interest-only mortgage as a stop-gap measure for financing your home, a Graduated Payment Mortgage might be a better option.

This mortgage starts with very low monthly payments similar to an option mortgage. The initial payment may not be enough to cover the interest due that month; this results in negative amortization for a short period of time. Negative amortization is a bad thing; however, if it allows you to get settled in your new home as a temporary measure, that could be a tolerable amount of risk.

As time progresses, the payment amount gradually increases to cover both the interest and principal balance due. With this graduated payment structure your initial monthly payments will be at least one hundred dollars less than other mortgage options. The repayment schedules these loans follow vary from one lender to the next; it is important to compare loan offers from a variety of lenders to find the best mortgage for you.

The primary advantage of a Graduated Payment Mortgage is the lower initial payments. If you know your income will be increasing 2-3 years down the road, for example if your spouse will be entering the workforce, this type of loan could help your budget.

There is a downside to this type of mortgage; if your income does not increase enough to cover the payment increases you could fall behind on your mortgage. The negative amortization you may experience in the beginning will cost you more than if you had financed with a traditional mortgage; however, the advantage of the lower payment amount could be worth the expense. To learn more about finding the right mortgage register for a free mortgage guidebook.

To get your free mortgage guidebook visit RefiAdvisor.com using the link below.

Louie Latour is a mortgage professional and the owner of RefiAdvisor.com, a mortgage resource site offering a free gift for homeowners: "Mortgage Refinancing – What You Need to Know." This guidebook helps homeowners avoid common mortgage mistakes and predatory lending practices.

From wikipedia:

A graduated payment mortgage loan, often referred to as GPM, is a mortgage with low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future. For instance a medical student who is just about to finish medical school might not have the financial capability to pay for a mortgage loan, but once he graduates, it is more than probable that he will be earning a high income. It is a form of negative amortization loan.

GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo mortgage. Over a period of time, typically 5 to 15 years, the monthly payments increase every year according a predetermined percentage. For instance, a borrower may have a 30-year graduated payment mortgage with monthly payments that increase by 7 % every year for five years. At the end of five years, the increases stop. The borrower would then pay this new increased amount monthly for the rest of the 25-year loan term. [1]

 

The graduated payment mortgage seems to be an attractive option for first-time home buyers or those who currently do not have the resources to afford high monthly home mortgage payments. Even though the amounts of payments are drawn out and scheduled, it requires borrowers to predict their future earnings potential and how much they are able to pay in the future, which may be tricky. Borrowers could overestimate their future earning potential and not be able to keep up with the increased monthly payments.

Eventually, even if the graduated payment mortgage lets borrowers save at the present time by paying low monthly amounts; the overall expense of a graduated payment mortgage loan is higher than that of conventional mortgages, especially when negative amortization is involved.

 

 

Jack Guttentag writes: 

 

              

 

             

GPM stands for "graduated payment mortgage", meaning a mortgage on which the payment starts low and rises over time. Since the initial payment is used to qualify the borrower, the GPM may allow a borrower to qualify who would not qualify with a standard fixed-rate mortgage (FRM).

How a GPM Works

For example, the mortgage payment on a $200,000 FRM for 30 years at 6% is $1199. Stretched over 40 years, the payment would be $1100. But the initial payment on a 30-year GPM at 6.50%, on which the payment rises by 7.5% a year for 5 years, is only $941. The interest rate on the GPM is fixed, just as it is on a standard FRM.

The quid pro quo for the low initial payment is a larger payment later on. The payment on the GPM rises for 5 consecutive years, reaching $1351 in month 61, where it stays for the remainder of the term.

The initial payment on a GPM does not cover the interest. The difference, termed "negative amortization", is added to the loan balance. In the example, the loan balance peaks at $202,905 in month 36 before it starts down. Not until month 61 does the balance fall below $200,000. This rising balance is a feature that lenders don’t like, and it is why they charge a higher rate for GPMs than for FRMs.

Alternative Types of GPMs

Other GPMs have different rates of payment increase over different periods. One has a 3% graduation rate over 10 years instead of 7.5% for 5 years. Assuming the same 6.5% rate, the initial payment would be higher at $1031, rising to $1388 in month 121. Negative amortization, however, is smaller, peaking at $200,908 in month 24.

GPMs Versus Temporary Buydowns

The GPM is not the only type of mortgage with rising payments. FRMs with temporary buydowns also carry lower payments in the early years. For example, the payments in the first two years on an FRM with a 2-1 buydown are calculated at rates that are 2% and 1% lower than the rate on the FRM. On a 6% 30-year FRM of $200,000, the first year payment would be $955, rising to $1074 in year 2 and to $1199 in years 3-30. And the buydown loan amortizes as it would without the buydown – there is no negative amortization!

For a temporary buydown to work, however, someone must fund the required buydown account. Withdrawals from this account supplement the payments made by the borrower in years 1 and 2 so that the lender receives the same payment ($1199) throughout. The $4436 required for the buydown account must be provided either by the borrower or the home seller. GPMs don’t require a buydown account.

 

 

 

Graduated Payment Mortgages are loans that start with low monthly payments that gradually increases at regular intervals. This type of mortgage is perfect for the self employed or any homeowner that expects their future income to increase steadily.

These loans are a type of hybrid mortgage that offer fixed interest rates on a graduated repayment schedule. If you are looking at an interest-only mortgage as a stop-gap measure for financing your home, a Graduated Payment Mortgage might be a better option.

This mortgage starts with very low monthly payments similar to an option mortgage. The initial payment may not be enough to cover the interest due that month; this results in negative amortization for a short period of time. Negative amortization is a bad thing; however, if it allows you to get settled in your new home as a temporary measure, that could be a tolerable amount of risk.

As time progresses, the payment amount gradually increases to cover both the interest and principal balance due. With this graduated payment structure your initial monthly payments will be at least one hundred dollars less than other mortgage options. The repayment schedules these loans follow vary from one lender to the next; it is important to compare loan offers from a variety of lenders to find the best mortgage for you.

The primary advantage of a Graduated Payment Mortgage is the lower initial payments. If you know your income will be increasing 2-3 years down the road, for example if your spouse will be entering the workforce, this type of loan could help your budget.

There is a downside to this type of mortgage; if your income does not increase enough to cover the payment increases you could fall behind on your mortgage. The negative amortization you may experience in the beginning will cost you more than if you had financed with a traditional mortgage; however, the advantage of the lower payment amount could be worth the expense. To learn more about finding the right mortgage register for a free mortgage guidebook.

To get your free mortgage guidebook visit RefiAdvisor.com using the link below.

Louie Latour is a mortgage professional and the owner of RefiAdvisor.com, a mortgage resource site offering a free gift for homeowners: "Mortgage Refinancing – What You Need to Know." This guidebook helps homeowners avoid common mortgage mistakes and predatory lending practices.

Claim your free guidebook today at: http://www.refiadvisor.com

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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