A Graduated Payment Mortgages (GPMs) is similar to Adjustable Rate Mortgages (ARM) in that the borrower gets to have a lower monthly initial. This type of mortgage starts out with lower payments than you would get with a normal, standard mortgage. However, your payments will increase over time “graduate”.
The Graduate Payment Mortgage basically gives early home owners the opportunity to buy property at an early stage. However, they will need to be sure of a rise in income in the near future or this can also lead to foreclosure. It allows a borrower to qualify at a payment lower than a comparable fixed rate loan. By qualifying at a relatively lower payment, one can obtain a larger loan and potentially purchase a higher priced home
Unlike an ARM, GPMs have a fixed 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. Usually, for 5 to 15 years, the percentage increases and the payments go up. Once the predetermined amount of time is finished, the increases stop and the payments remain the same from that point on.
You can generally find Graduated Payment Mortgages in the form of 15 and 30 year loans. The initial smaller payments are stretched out over a span of 5 15 years. Each year, they increase based on a set percentage that you've pre negotiated.
For example, you might have payments that increase 6 each year for five years. If you have a 30 year loan, then you would pay that increase for five years and then for the remaining 25 years, your payments would be the same.
If your income is sure to rise over time, then both an ARM or a GPM wouldn't be much of a worry.
But if the only reason you're considering it is in the event that you want to buy more house than you can currently afford, and you're unsure what the future holds for you, then both an ARM and a GPM could be risky ventures that result in a foreclosure.
With both the GPM and ARM, the borrower ends up paying more on the life of the loan, because the lower initial interest rates and smaller monthly payments drag the loan out longer.
If the interest rate jumps significantly, the borrower may end up paying far more than they would have if they had secured a traditional fixed rate mortgage instead. Eventually, the payments are being made even as the loan continues to grow, which is known as negative amortization. The scheduled negative amortization on a GPM differs depending on the amortization schedule, the note rate and the payment increases of the loan.
The big danger of a GPM is that your income may not be enough in the future to make your monthly payments and may lead to foreclosure. Always do proper research and calculations when taking out a mortgage.
The Author is a Bond Originator in South Africa. If you need to read more on SA HomeLoans you can visit http://SecureBonds.co.za
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