Graduated Payment Mortgages (GPMs)

The GPM is another alternative to the conventional adjustable rate mortgage, and is making a comeback as borrowers and mortgage companies seek alternatives to assist in qualify for home financing.

Unlike an ARM, GPMs have a fixed note rate and payment schedule. With a GPM the payments are usually fixed for one year at a time. Each year for five years the payments graduate at 7.5% – 12.5% of the previous years payment.

GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo loans. With the graduated payments and a fixed note rate, GPMs have scheduled negative amortization of approximately 10% – 12% of the loan amount depending on the note rate. The higher the note rate the larger degree of negative amortization. This compares to the possible negative amortization of a monthly adjusting ARM of 10% of the loan amount. Both loans give the consumer the ability to pay the additional principal and avoid the negative amortization. In contrast, the GPM has a fixed payment schedule so the additional principal payments reduce the term of the loan. The ARMs additional payments avoid the negative amortization and the payments decrease while the term of the loan remains constant.

The scheduled negative amortization on a GPM differs depending on the amortization schedule, the note rate and the payment increases of the loan. GPM loans with 7.5% annual payment increases offer the lowest qualifying rate but the largest amount of negative amortization.

Contact your mortgage professional for additional information and program availability.

The note rate of a GPM is traditionally .5% to .75% higher than the note rate of a straight fixed rate mortgage. The higher note rate and scheduled negative amortization of the GPM makes the cost of the mortgage more expensive to the borrower in the long run. In addition, the borrowers monthly payment can increase by as much as 50% by the final payment adjustment.

The lower qualifying rate of the GPM can help borrowers maximize their purchasing power, and can be useful in a market with rapid appreciation. In markets where appreciation is moderate, and a borrower needs to move during the scheduled negative amortization period they could create an unpleasant situation.

Graduated Payment Mortgages

Graduated Payment Mortgages: What They Are and Whether You Should Get One

What are Graduated Payment Mortgages?

Graduated Payment Mortgages are mortgages that start with low monthly payments then they will gradually increase over set period of time. Usually these loans will increase by a certain percentage every year. Eventually the rates will plateau to a fixed rate. These loans are designed to help individuals that do not have the financial stability when the loan was received.

However, it is expected that these individuals will in the future have the financial means to pay the increased monthly payments. For example, a lot of graduate students, like doctors, dentists, and lawyers, may not have the money to make payments early on but will later in their careers.

As discussed above, these loans are best for individuals who do not have the financial means when seeking a loan. Also, they are helpful to any new homebuyers. Graduated Payment Mortgages allow individuals to get a loan based on their future earning status. This helps individuals obtain a loan to get a house with a very low starting income.

Should I get a Graduated Payment Mortgage?

This is a question that can be difficult to answer. Graduated Payment Mortgages are extremely helpful due to the fact that an individual that does not have the financial means can still get a house. However, these Graduated Payment Mortgages can also cause a lot of problems. The mortgage and the lender assume that the individual will have the financial means in the future to make the increased monthly payments.

Essentially, financial forecasts are made to know what the financial situation will be in the future. The worry should come from the fact that they are indeed forecasts. In the future, there may not be the money that was first forecasted. This can cause problems, such as not being able to make payments and eventually defaulting on the loan. However, depending on your career choice it may being easier to forecast for some careers such as a medical doctor unlike forecasting for an entrepreneur.

If the decision is made to obtain one of these loans, it should be understood that each year the rates are going to increase. This should not be an issue if proper steps are taken to plan for the payments. Proper steps could be creating a payment plan that you strictly adhere to, and creating a plan that will get you to financial stability that will allow you to make the payments.

Benefits of a Stepped-Payment Mortgage

There are a lot of benefits to receiving this type of a mortgage. It can help those who are not in a financial position to be in a house. This is a great benefit to these individuals. If there were not Graduated Payment Mortgages, then these individuals would have to figure out other places to reside until they could afford a fixed rate mortgage. These mortgages propel individuals into a house, even if they do not have the financial means. There can also be some negative consequences that come from these mortgages.

Cons of a Stepped-Payment Mortgage

FHA.com highlights that [those who obtain Graduated Payment Mortgages] need to recognize that over the life of the mortgage, they will pay more in interest than they would have had they chosen a mortgage with payments that remained the same over the life of the loan.” These loans truly are offered for the purpose of assisting people that cannot get a fixed rate mortgage. However, there are consequences, like paying more in interest.

To determine whether Graduated Payment Mortgages are right for you, will most likely be decided by a few factors. You must know what your financial forecast will be and that you do not have the means now to get a fixed mortgage. If you fall under both of these categories, then this really is a great option, and maybe one of your only options, to get into a home.

If you feel like this would be a great option for you, Home Mortgage serves the following locations:

  • Phoenix
  • Glendale
  • Scottsdale
  • Mesa
  • Chandler
  • Queen Creek
  • Maricopa
  • Carefree
  • Peoria
  • Surprise
  • Sun City West
  • Goodyear
  • Litchfield Park
  • Tolleson
  • Waddell
  • Komatke
  • Guadalupe
  • Paradise Valley
  • Casa Blanca
  • Chandler Heights
  • Sun Lakes
  • Santan
  • Cave Creek

How to get a Graduated Payment Mortgage?

After you have decided that your financial forecast will be sufficient and you do not have the money to get a fixed rate mortgage, then you should understand the process of getting a graduated mortgage.

There are many steps to obtaining a mortgage. Depending on your circumstances these steps may have slight variations. If you know that you want a Graduated Payment Mortgage at the beginning, then the process of obtaining a mortgage can be shortened.

A lender will examen many factors in giving you a loan. Some of these factors are your credit score, income, and debt. These three factors tell the lender a lot about your situation. It will tell the lender which mortgage may be right for you. Being able to talk to the lender will be important for any loan, but especially Graduated Payment Mortgages.

With the lender knowing your present financial situation and future forecasted financial situation, they will then be able to discuss the graduated mortgage you desire. By answering the lender’s basic questions, the lender may be able to pre-qualify you for the loan you desire. However, before the mortgage is actually obtained, the lender will have to help you get pre-approved. This process is a more detailed process that will allow the lender to dig into your credit history, your financial circumstances, assets, and potentially your earning ability. From this point, you will be able to close on the house that you have desired.

In conclusion, Graduated Payment Mortgages are a great option if you are a young family or trying to get your financial feet steadied. They allow you to purchase a home while you would not be able to obtain most other mortgages. You will be able to start your life and settle down with this type of a mortgage. This is a great option if you are vigilant in making payments and budgeting for increased payments in the future. You should have a schedule that shows you when payments will increase and by what amount. Then you should have a financial plan that will match the schedule. This plan can include when to save, invest, or change jobs to meet the increasing monthly payments. Although, there may be some extra interest paid it may be your only option for a mortgage.