What is Graduated Payment Mortgage ?

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A graduated payment mortgage (GPM) is a type of fixed-rate mortgage for which the payments increase gradually from an initial low base level to a higher final level. Typically, the payments will grow between 7% to 12% annually from their initial base payment amount until the full monthly payment amount is reached.

Definition

A Graduated Payment Mortgage (GPM) is a type of fixed-rate mortgage where the payment amounts start at a lower base level and gradually increase to a higher final level. Typically, the payment amounts increase at an annual rate of 7% to 12% until reaching the full monthly payment amount.

Origin

The Graduated Payment Mortgage originated in the United States in the 1970s, designed to help homebuyers afford mortgage payments during the early stages of lower income. Over time, the borrower's income is expected to increase, enabling them to handle higher payments.

Categories and Features

The main feature of a Graduated Payment Mortgage is its increasing payment amounts, usually reaching a fixed monthly payment level within 5 to 10 years. This type of loan is suitable for borrowers who anticipate an increase in future income. Its advantage is lower initial payments, while the disadvantage is the potential for significantly higher payments later on.

Case Studies

Case 1: In the 1980s, many young professionals in the U.S. opted for Graduated Payment Mortgages, expecting their future income to rise. Case 2: In the early 2000s, during a real estate boom in certain areas, homebuyers used Graduated Payment Mortgages to purchase larger or more expensive properties, anticipating that future income growth would cover the higher payments.

Common Issues

Common issues for investors include the risk of not being able to afford higher payments if income growth does not meet expectations. Additionally, Graduated Payment Mortgages may lead to negative amortization initially, meaning the loan balance could increase during the early stages.

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