Graduated Payment Mortgage

Buying and enjoying your own home is a fundamental part of the American Dream and everyone wants a place they can call their own. However, not everyone can afford to buy a home using a traditional mortgage loan. In order to make a mortgage easier to obtain and budget, some people take on a graduated payment mortgage. A graduated payment mortgage essentially allows you to make smaller mortgage payments at the beginning of the life of your loan, then contribute a larger sum to paying down the loan as time goes by.

How a Graduated Payment Mortgage Works

A graduated payment mortgage, commonly referred to as a GPM, is a type of fixed-rate home loan. While the interest rate remains the same, you make a lower initial monthly mortgage payment at the beginning of the loan term. That payment will eventually begin to rise after a certain period of time has passed as stipulated by the mortgage contract. Borrowers often take on a graduated payment mortgage is because they can’t qualify for a typical fixed-rate mortgage. With a graduated payment mortgage, they can finally afford to buy their own home.

Is a GPM Right for You?

There are some downsides to getting a graduated payment mortgage. As a type of negative amortization mortgage, the initial payments on a GPM don’t cover all the interest. That means the difference will be added onto the principal amount of the loan.

For example, let’s say you get a loan of $100,000. The GPM mortgage payment is $800 per month, but the total interest charged is actually $1,000. That means that the remaining $200 will be added to the initial loan amount so at the end of the first month, the amount of your loan has grown to $100,200.

This will be the case until a certain point in the lifespan of your loan, when your graduated loan payments rise (in this example, to $1,100) and a portion of the monthly payment can go towards paying off the principal.

Graduated payment mortgages are not for everyone. While they may help someone with a lower monthly income buy a home they could otherwise not afford, it may present a problem in the future if income doesn’t increase along with the payments. Before committing to any type of loan, it’s important to discuss your options with a financial planner or similar professional who can help you decide which is best for you.