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Graduated Payment Mortgages
Graduated Payment Mortgage
A Graduated Payment Mortgage is a type of Negative Amortization Mortgage that starts with a low payment and rises for a set number of years (usually 5). At the end of this period the payment remains fixed for the remainder of the loan. The major difference between the Graduated Payment Mortgage and Traditional Fixed Rate Mortgages is the period of graduated payments. A Traditional Fixed Rate Mortgage's payments will remain the same for the life of the mortgage.
The major benefit to a Graduated Payment Mortgage is that it allows the buyer to qualify for loans they otherwise wouldn't. Instead of having to qualify for the payment at the end of the graduating term the borrower only has to qualify for the initial payment. This is especially beneficial for people that expect their income to increase within the first five years of purchasing a home. They start with low payments and easier qualification requirements then gradually increase their monthly payment amount as their income increases.
The major drawback of a Graduated Payment Mortgage is negative amortization that results from the reduced payment. Initially, the payment amount is set so low that it doesn't even cover the interest on the loan. The remaining interest is added on to the principal and calculated as such in the next period. If borrowers aren't careful they can end up with a mortgage they can't afford and a house they have no equity in. The same applies for lenders. Writing a Graduated Payment Mortgage for the wrong borrower could lead to a foreclosed property that isn't worth what is owed on it. Another drawback is the overall expense of this loan type. The amount of interest paid throughout the life of the loan is significantly more than that of traditional mortgage types.