A graduated payment mortgage loan, often referred to as GPM, is a

mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

with low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young people who cannot afford large payments now, but can realistically expect to raise their incomes 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 A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

, but once he graduates, it is more than probable that he will be earning a high income. It is a form of

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 loa ...

loan.

Mechanism

GPMs are presently only readily available in the United States for mortgages insured by the

Federal Housing Administration The Federal Housing Administration (FHA), also known as the Office of Housing within the Department of Housing and Urban Development (HUD), is a United States government agency founded by President Franklin Delano Roosevelt, created in part by ...

. Over a period of time, typically 5 to 15 years, the monthly FHA mortgage 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."What is a Graduated Payment Mortgage? "
, nextag.com

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 difficult. If borrowers overestimate their future earning potential they may not be able to keep up with the increased monthly payments. 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

is involved.

References

External links

{{DEFAULTSORT:Graduated Payment Mortgage Loan Mortgage industry of the United States Loans