Types of Mortgage


4. Graduated-Payment Mortgage (GPM)

A type of flexible -payment mortgage, where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
In other words mortgage finance is a contract in which payments start at a relatively low level and rise for a period of time-usually to a stable level which holds until maturity.

This is a good option for buyers who expect their incomes to rise. Basically, a percentage of interest is delayed and added onto the principal. The disadvantage is that your loan balance increases, rather than decreases, for the first few years. Your monthly payments start out low. Then they increase each year by about 5 percent to 7.5 percent, until they include all the interest due with each payment.

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 rates 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.
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.  
Lenders offer different GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years.

Example :
The following table compares the monthly payment schedule of a 30 year fixed rate loan with the most frequently used GPM plan. In this plan payments increase 7.5 percent each year for 5 years before leveling off.
The example uses a mortgage with a loan amount of $60,000 and an interest rate of 10 percent.

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