Graduated Payment Mortgage GPM

A graduated-payment mortgage (GPM) is designed to be more affordable in the early years than the traditional mortgage. Its monthly payments start low and increase by a fixed percentage every year for five years.

The graduated-payment mortgage's amortization chart looks similar to the traditional loan's amortization chart, but it is different. For the first five years, the remaining loan balance goes up slightly instead of down like the traditional loan. This is called negative amortization. Negative amortization occurs when your monthly payment is too small to cover the interest due your lender, so the amount you pay goes up to cover the interest.

The outstanding principal balance of this graduated-payment mortgage reaches a maximum $104,050 at the end of the fifth year before starting back down again. Negative amortization is not inherently bad. It is simply a way for you to borrow more money so that you can buy the home that you want.

Advantages

The main advantage of the graduated-payment mortgage is affordability. Because of its low starting payments, you can qualify for a larger loan with less income.

This mortgage form is ideally suited for young homebuyers whose income will rise to meet the GPM's monthly payments through raises and promotions.

Disadvantages

First, lenders charge a slightly higher interest rate for GPMs. The rate for a graduated-payment mortgage is typically 0.75 percent to 1 percent higher than for a traditional mortgage.

Second, lenders usually require at least a 10-percent down payment with a GPM, compared with a minimum of 5 percent with a traditional mortgage.

Third, negative amortization, although not usually a problem, can be under certain economic conditions. If home values go down in your area, a GPM's loan balance may become larger than the home's reduced value. This also can happen with a 5-percent down payment loan. The real problem is not negative amortization, but the local economy.