What is a Graduated Payment Mortgage and how do payments increase?

Starting a mortgage with lower monthly payments that grow over time might sound like a dream come true for many homebuyers. That's exactly what a Graduated Payment Mortgage (GPM) offers - but like any financial tool, it comes with its own set of considerations.

Graduated Payment Mortgage (GPM): A mortgage where the monthly payments start lower than a traditional loan and gradually increase over time according to a set schedule. This type of loan typically helps borrowers qualify for larger loans by starting with more affordable payments, though the payments will become significantly higher in later years.

Introduction to Graduated Payment Mortgages (GPMs)

GPMs first appeared in the 1970s during a period of high inflation and rising home prices. They were created to help first-time homebuyers enter the housing market by offering lower initial payments. The mortgage industry recognized that many young professionals needed a way to buy homes while their careers were just starting.

How Graduated Payment Mortgages Work

The structure of a GPM is unique. Your payments start below what you'd pay with a traditional mortgage, then increase annually for a set period. For example, if you have a $300,000 mortgage, your initial monthly payment might be $1,200, increasing by 7% each year for five years.

The graduation period typically lasts 5-10 years, with annual increases ranging from 2% to 7.5%. After the graduation period ends, your payments level off for the remainder of the loan term.

One catch: during those early years of lower payments, you might not be covering all the interest due. This leads to negative amortization - where your loan balance actually grows instead of shrinking.

Benefits of GPMs

• You can buy a home sooner rather than waiting years to save for higher payments

• Initial payments fit better with entry-level salaries

• You might qualify for a more expensive home than with traditional financing

• The payment schedule matches expected career growth

Potential Risks and Considerations

Payment shock is real. Your monthly payment could double or triple by the end of the graduation period. Let's say your initial payment is $1,000. With a 7% annual increase over five years, you're looking at a payment of about $1,400 by year six.

Negative amortization poses another risk. If your early payments don't cover all the interest, your loan balance grows. This means you could end up owing more than your original loan amount.

Who Should Consider a GPM?

GPMs make sense for certain borrowers:

• Medical residents expecting significant income increases

• Law associates on partnership tracks

• Technology professionals with strong growth potential

However, if you're on a fixed income or your career path is uncertain, a GPM might not be your best choice.

Comparing GPMs to Other Mortgage Types

Unlike fixed-rate mortgages, which keep the same payment throughout the loan, GPMs have scheduled increases. They differ from adjustable-rate mortgages (ARMs) too - GPM increases are predetermined, while ARM changes depend on market rates.

Application Process

Lenders look closely at your future income potential when considering a GPM application. You'll need:

• Current income documentation

• Career trajectory evidence

• Strong credit history

Common Questions and Misconceptions

• Can you refinance a GPM? Yes, but timing is critical

• Are payment increases guaranteed? Yes, they're set at the start

• Can you pay extra to avoid negative amortization? Yes, most GPMs accept additional principal payments

Making an Informed Decision

Before choosing a GPM, map out your financial future. Consider:

• Your career growth prospects

• Local real estate market stability

• Your comfort with rising payments

Next Steps

Choosing the right mortgage requires careful consideration of your financial situation and goals. Bellhaven Real Estate's mortgage specialists can help you evaluate whether a GPM fits your needs and guide you through the entire home buying process. Schedule a consultation to explore your mortgage options and find the perfect solution for your homebuying journey.