What is a Graduated Payment Mortgage (GPM)?
A Graduated Payment Mortgage (GPM) is a fixed-rate mortgage with payments that gradually grow from a low starting point to a higher final point. Payments will typically increase by 7% to 12% per year from their initial base payment level until the full monthly payment amount is attained.
Graduated Payment Mortgage Definition
A progressive payment mortgage loan, often known as a GPM loan, is a loan with modest initial monthly payments that steadily grow over time. These programmes are mostly aimed at young individuals who cannot currently afford significant payments but can reasonably anticipate increasing their earnings in the future. For example, a medical student preparing to graduate from medical school may not have the financial means to repay a home loan, but once he graduates, he will almost certainly be earning a high salary. It’s a type of loan with a negative amortization schedule.
How does GPM work?
A progressive payment mortgage is set up such that the homeowner only has to make minimum payments at first. Then, as time passes, the payment amount rises. The buyer is qualified by a low initial interest rate. Since of the decreased interest rate, many people who would not normally qualify for a home loan can now do so because they can afford the low initial payments.
These buyers may not have qualified if the note had been written at a higher interest rate because of the higher monthly payments. Because young or first-time homeowners’ income levels tend to climb gradually, this form of mortgage payment method may be ideal for them.
A negative amortization loan may or may not be a progressive payment mortgage. The graduated payment mortgage is a negative amortization loan if the initial payment amount is smaller than the mortgage loan’s accrued interest. The payments made on a negative amortization loan are less than the interest levied on the loan. Deferred interest accrues as a result of this payment plan, increasing the loan’s total principle.
Graduated Payment Mortgage Pros
Graduated payment mortgages can provide some significant advantages to homebuyers. The following are some of the benefits of progressive payment mortgage loans:
- Mortgage qualification might be made easier depending on income.
- Payments will be lower at first, but will increase as your income rises.
- The ability to be flexible when it comes to budgeting monthly expenses
Choosing a progressive payment mortgage could make it easier to buy a home now rather than waiting until you earn more money later. Accepting a payment arrangement that changes with your income may also allow you to receive more house for your money. The key is knowing that you’ll be able to keep up with your mortgage payments as they rise over time.
Graduated Payment Mortgage Cons
The most significant downside of a progressive payment mortgage is that the total costs are higher than with a standard mortgage. As the interest rate on the loan rises, the borrower may find that they are simply paying interest and not reducing the principal owing.
Another significant disadvantage to consider is that a progressive payment mortgage does not guarantee that the borrower’s income will rise in tandem with the higher mortgage payments. The borrower may fail on the loan if their income does not increase in proportion to their monthly obligation. The default will harm their credit even further, and the lender will foreclose on their home.
Calculating Graduated Payments
The amount of the mortgage loan, the interest rate, the annual graduation rate, and the number of graduations applied are used to calculate graduated payments. An online loan calculator can be used to determine monthly payments for a progressive mortgage.
Financial Consultant and Author