QandAs: Loans

What is Graduated Mortgage Payment or GPM?

Answer:
A graduated mortgage payment (GPM) is a home

loan that has a low initial monthly payment, but gradually increases over the course of 5 to 15 years. If you live in an area that experienced a recent housing boom, qualifying for a home purchase might pose a problem. In an effort to help buyers afford a new home, many mortgage lenders began offering creative financing options.

These typically involved home loans that offered low initial payments. Adjustable rate mortgages include similar features; however, graduated mortgage payments appeal to more buyers because it includes a fixed rate. Although the mortgage payment increases, the interest rate on the home loan remains the same.

There are advantages and disadvantages to a graduated mortgage payment. The obvious advantage is a lower monthly payment, which makes it possible for buyers to purchase a more expensive home. Of course, buyers must prepare for a future payment increase.

With a GPM, the monthly payment will increase by a pre-determined percentage each year. This option is perfect for buyers who anticipate an income increase in the near future. Unfortunately, a graduated mortgage payment typically results in negative amortization.

Borrowers pay more interest in the beginning, and monthly interest payments are not enough to cover the interest due. As a result, the loan balance grows.


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