What is a Growing Equity Loan?
What are Growing Equity Loans
A growing equity loan is a type of mortgage with a fixed rate where the amount paid monthly is increased over time in accordance with an agreed-upon payment schedule. This translates to more money applied to the principal of the loan, shortening its life and accruing less interest on the loan while increasing the equity in the home. Since the growing equity loan initial payment amount is higher than the monthly amount required to pay off the loan over time, the payments ensure that there would never be negative amortization of the loan, which implies making payments of less than what is typically required on a monthly basis in order to pay off the loan principal and interest.
Growing equity loans are often confused with graduated payment loans, which follow the same structure, but start off with a first payment that is less than the required monthly amount, resulting in negative amortization.
Many lenders offer growing equity payment schedules as a way of offsetting a lower down payment made by the borrower. Sometimes, it is offered when borrowers do not qualify for a conventional home loan. One example of this is the growing equity loan option offered by the Federal Housing Administration.