QandAs: Loans

What is a Graduated Payment?

Answer:
A graduated payment mortgage is a home loan

that offers low initial payments. Over time, the mortgage payments gradually increase and become fully amortized. Payment increases occur on an annual basis for 5 to 15 years, and the percentage of increase is predetermined. While this type of home loan is beneficial and allows borrowers to purchase more expensive homes, there are specific risks that should be considered.

The advantageous of a graduated payment are obvious. With the price of real estate and mortgage interest rates increasing, many people are unable to afford a new home.

To accommodate buyers, several mortgage lenders have begun offering programs intended to attract first time buyers and make homeownership an affordable reality. This type of mortgage is perfect for anyone who anticipates a higher income in the future. Once monthly payments increase, they’ll be able to comfortably afford the extra expense. Unfortunately, a few buyers do not prepare well in advance for higher payments. As a result, they experience payment shock.

Another drawback is that graduated payments often result in negative amortization. Initial payments are rarely enough to cover the interest due on the mortgage loan. In turn, the loan balance grows each month throughout the early years.


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