Graduated Payment Mortgage
In real estate, a graduated payment mortgage (GPM) is a type of mortgage loan structure where the initial payments start low and gradually increase over time before leveling off at a predetermined level. This gradual increase in payments allows borrowers to ease into higher monthly payments, making homeownership more affordable during the early years of the loan when income may be lower.
The key features of a graduated payment mortgage include:
1. Gradually increasing payments: With a GPM, borrowers start with lower initial payments that increase at regular intervals, typically annually or biennially, for a set period of time. The payment increases are predetermined and specified in the loan agreement.
2. Leveling-off period: After the initial period of increasing payments, the payment amount typically levels off and remains constant for the remainder of the loan term. This leveling-off period ensures that the borrower’s payments stabilize and do not continue to increase indefinitely.
3. Negative amortization: In some GPMs, the initial payments may be set below the amount required to fully amortize the loan over its term, resulting in negative amortization. This means that the outstanding balance of the loan may increase during the early years of the mortgage before starting to decrease as the payments increase.
4. Longer loan term: GPMs may have longer loan terms compared to traditional fixed-rate mortgages, allowing borrowers more time to repay the loan and potentially lower monthly payments during the leveling-off period.
5. Risk considerations: While GPMs can make homeownership more affordable for borrowers in the short term, they also carry the risk of higher payments in the future, especially if the borrower’s income does not increase at the same rate as the payment increases. Borrowers should carefully consider their long-term financial stability and ability to afford higher payments before choosing a GPM.
In real estate financing, GPMs can be attractive options for borrowers who expect their income to increase over time or who prefer lower initial payments during the early years of homeownership. However, borrowers should carefully review the terms and risks associated with GPMs and consider their long-term financial goals and circumstances before selecting this type of mortgage.
