Graduated payment mortgage loan
Encyclopedia
A graduated payment mortgage loan, often referred to as GPM, is a mortgage
with low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future. For instance a medical student who is just about to finish medical school might not have the financial capability to pay for a mortgage loan
, but once he graduates, it is more than probable that he will be earning a high income. It is a form of negative amortization
loan.
Eventually, even if the graduated payment mortgage lets borrowers save at the present time by paying low monthly amounts; the overall expense of a graduated payment mortgage loan is higher than that of conventional mortgages, especially when negative amortization
is involved.
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
with low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future. For instance a medical student who is just about to finish medical school might not have the financial capability to pay for a mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
, but once he graduates, it is more than probable that he will be earning a high income. It is a form of negative amortization
Negative amortization
In finance, negative amortization, also known as NegAm, deferred interest or graduated payment mortgage, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases...
loan.
Mechanism
GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo mortgage. Over a period of time, typically 5 to 15 years, the monthly payments increase every year according to a predetermined percentage. For instance, a borrower may have a 30-year graduated payment mortgage with monthly payments that increase by 7 % every year for five years. At the end of five years, the increases stop. The borrower would then pay this new increased amount monthly for the rest of the 25-year loan term.Risk
The graduated payment mortgage seems to be an attractive option for first-time home buyers or those who currently do not have the resources to afford high monthly home mortgage payments. Even though the amounts of payments are drawn out and scheduled, it requires borrowers to predict their future earnings potential and how much they are able to pay in the future, which may be tricky. Borrowers could overestimate their future earning potential and not be able to keep up with the increased monthly payments.Eventually, even if the graduated payment mortgage lets borrowers save at the present time by paying low monthly amounts; the overall expense of a graduated payment mortgage loan is higher than that of conventional mortgages, especially when negative amortization
Negative amortization
In finance, negative amortization, also known as NegAm, deferred interest or graduated payment mortgage, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases...
is involved.