Graduated Payment Mortgages

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There’s a common misconception that most mortgages fall into one or two major categories and beyond that are pretty much the same. It’s easy to look at different mortgages and say that they’re fixed-rate or adjustable-rate loans and be done with it, but that’s obviously accurate only in the barest sense. There are a lot of different mortgage options available on the market, and they are just about as unique as the borrowers who take them out.

One lesser-known mortgage option that’s popular with first-time home buyers and some others with currently limited funding is the graduated payment mortgage or GPM. These loans let you start out with a reduced monthly payment that gradually grows to the full payment amount over time. If this sounds like it might help you achieve your dreams of homeownership, here are some answers to the most common GPM questions people ask.

How Exactly Does a Graduated Payment Mortgage Work?

When you take out a GPM, your monthly payment will be set at a low base level based on what your lender offers and what you qualify for. For the first year, your payments will all be at this level. Each year after that, the monthly payment will increase by a percentage (typically 7% to 12%) until you eventually reach the maximum amount specified by your loan agreement. From that point on, the loan payments won’t increase any further; the interest rate will remain fixed and you’ll simply have to make payments at the highest payment level for the remainder of the loan.

Who Is a GPM Designed For?

First-time homeowners are the ones who are most likely to take advantage of a graduated payment mortgage.  This product gives them a lower payment to start with and allowing them time to get used to having the full mortgage payment in their budget. That said, anyone who is getting ready to move into a new position, expecting a salary increase in coming months or otherwise needing a payment that will be as low as possible in the short term might benefit from a GPM.

Do GPMs Use Fixed or Variable Interest Rates?

Graduated payment mortgages are fixed-rate loans. Having a fixed rate makes it much easier for borrowers to keep track of their loans.  Naturally, introducing variable interest rates on top of the monthly payment’s annual percentage increases would result in a payment amount that could continue changing even after it reaches its supposed maximum.

Are There Any Special Qualifications for Taking Out a GPM?

Some loans issued through specific lending programs may have special limitations or other qualifications that borrowers have to meet. Specific qualifications may also be set by lenders based on their own criteria, including minimum qualifying credit scores and required income levels. But as a whole, there are no specific qualifications for GPMs that are inherent to the loans themselves.

Can I Get a GPM Through the FHA?

The primary source of graduated payment mortgages is through FHA lenders. This is due at least in part to the risk that the lender has to assume when issuing the loan; there’s no guarantee that the borrower will be able to meet the higher payments in the future, after all. Rules put in place after the financial collapse of the mid-2000s that require a lender to verify a borrower’s ability to repay a loan also hinder some GPM loans that aren’t backed by the government. As a result, most lenders will offer a GPM only as an FHA-secured loan.

How Does a GPM Compare to an ARM?

Though they may seem similar at first glance, graduated payment mortgages are significantly different than adjustable-rate mortgages (ARMs). ARMs are known for having a period where they have a fixed interest rate, after which the rate can shift slightly up or down each year. But with GPMs, the interest rate stays the same over the course of the loan. Shifting does occur in the total payment amount, though these shifts are unrelated to the loan’s interest rate; they are simply a transition from the base rate to the full payment rate that was agreed on in the loan contract. Even the time periods of the changes are different between the two loan types. ARMs experience their shifts after the initial fixed-rate period ends, while GPMs experience their shifts during the first few years of the loan and then stabilize at the set rate. If anything, the two loan products should be viewed as opposites instead of analogues.

Are There Any Disadvantages to Graduated Payment Mortgages?

GPMs aren’t for everyone, and there are a few disadvantages associated with these loans. The biggest disadvantage is that it can be difficult to estimate a borrower’s income level several years down the road, which means some borrowers may take out loans that they can’t afford once the full payment rate kicks in. Total costs associated with the loans are typically higher than other similar loans, and the shift in payment over the course of several years may result in the borrower spending years paying mostly if not entirely against accumulated interest.

Can I Refinance My Loan Later?

There is nothing specific to graduated payment mortgages that would prevent you from refinancing to get a better interest rate or loan payment amount. But be sure to consult your specific loan agreement, as some lenders may have clauses that charge a fee if you refinance the loan or otherwise terminate it before the full repayment period has ended.

As you can see, there are definitely situations where a GPM could be a big benefit. These loans are increasingly popular with recent graduates and others who are just starting out on a career path, since it’s easy to assume that the borrowers will be able to afford higher payments down the line. As with any loan product, though, it’s important to shop around and compare different lenders to make sure you’re getting the absolute best deal on your graduated payment loan before you sign on the dotted line.

If you would like to learn more about Graduated Payment Mortgages, fill out the form below and a home loan specialist will reach out to you!