Growing Equity Mortgage

Anyone looking to own a home has a lot of financing options available. One of these options is the growing equity mortgage, which may allow borrowers who would otherwise not be able to qualify for or afford a traditional home loan for a while secure a mortgage.

Basically, a growing equity mortgage is a home loan for borrowers who want to shorten the term of their fixed rate mortgage and pay less in interest by making larger monthly payments. At the beginning of the loan, monthly payments are smaller and then gradually increase according to a set schedule.

Growing Equity Versus Graduated Payment

Growing equity mortgages are often confused with graduated payment mortgages because monthly payments increase over time in both instances. However, the main difference lies in how each type of mortgage amortizes.

A graduated payment mortgage is a negative-amortization loan, which means monthly payments don’t cover all of the interest and the remaining difference is added to the principal amount of the loan.

However, growing equity mortgage payments are fully-amortizing, so they cover all of the interest owed for the month, plus part of the principal amount borrowed. As the payments increase, the difference between what you owe and what you pay is put toward paying down the outstanding balance, rather than adding to it. This way, you pay back your loan faster as time passes and end up paying less in interest.

If you’re considering a growing equity mortgage, it’s very important that your future earnings will keep up with growing payments. Of course, this is not the only mortgage option available to you, so evaluate different types of mortgages to find the one that best suits your needs.