Most borrowers are aware of fixed rate and adjustable rate mortgages, but not many have heard of graduated payment mortgage.
Which is a shame, because it can save you a fortune.
This kind of mortgage presents another alternative for borrowers looking for a mortgage loan product to fit their needs.
With a graduated payment mortgage, the payments start out being low and rise over time. When the loan officer qualifies the borrower for a graduated payment mortgage, the initial (low) payment is used. This usually allows the borrower to qualify when he might not qualify for a fixed-rate mortgage.
How it Works
Similar to a fixed-rate mortgage, the graduated payment mortgage has a fixed interest rate for the life of the loan. The payments on the graduated payment mortgage start out at a certain level and increase periodically by a percentage for a specific period of time.
For example, monthly payments on a $100,000 graduated payment mortgage might start out at $900 and increase by 7% every year for 5 years. After five years, the graduation is complete and the payments are fixed for the remainer of the loan.
During the graduation period, the graduated payment mortgage the monthly payments are not high enough to cover the interest on the mortgage. This causes a negative amortization. At the end of each year, the unpaid interest is added back to the loan causing the balance of the loan to increase.
The good news is that at the end of the graduation period, your payments begin to cover both the principle and the loan, thereby decreasing your balance.
GRM vs ARM
Graduated payment mortgages are often compared to adjustable rate mortgages because of the variation in payments over time. However, these two loan products differ greatly in many aspects. For one, the graduated payment mortgage has a fixed interest rate meaning the interest rate does not change for the life of the loan. With an adjustable rate mortgage, however, the interest rate does change.
The scheduled payments for a graduated payment mortgage are calculated in advance. On the other hand, payments for an adjustable rate mortgage can vary from one time period to the next depending on the terms of the loan.
Who Might Benefit
First-time homebuyers who are just starting out in their careers are ideal candidates for graduated payment mortgages. Since first-time homebuyers typically do not have high incomes, a graduated payment mortgage option makes it easier to qualify for a home loan.
In addition, those who are new in their careers typically expect to have pay increases over time which allow them to predict the ability to make the graduated payments.
Potential Risks
A borrower with a graduated payment mortgage runs the risk of overestimating their future earning potential making it difficult to afford the mortgage in the future.
If the homeowner sells the home before the loan begins to amortize, he runs the risks of losing money on the home, especially if it devalues during that period of time.
As with any other loan product, a borrower should assess both the benefits and the risks of a graduated payment mortgage before making a decision.
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Frequently Asked Questions
Work from home
By: Koren | 12-09-2008
I am interested in a work from home business or possibly a real estate foreclosure method of making money. Does anyone out there know of a real one that is not a scam?
Learn real estate investing
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Where can I get information about learning to invest in real estate?
Investing
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Can you tell me about an "access management account." Does this give you a tax savings and how does it work?
Where can I find copies of leases entered into by ...
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Where can I find copies of leases entered into by The City of New York for governmental purposes?
Rent or sell inherited house?
By: Liddy | 11-09-2008
Hi,
I am trying to decide if I should rent out or sell a recently inherited house.
The value of the property is about 370k which is my cost basis. For depreciation purposes the value of the building alone is about 250k. I could rent the house out for 1,550.00 per month. Monthly expenses will run about 675.00 ands all cash profit would be spent as income. If I sold the house I would invest about 350k and draw 4% off as income.
I am in my 40's and my family income is about 75k. We currently own our own home and 1 rental property. Our income should be rising to over 100k over the next 5 years.
I would like to look at three scenarios to decide if it is financially smarter to keep or sell the home. The 3 scenarios would be: 1) Keep the house, rent it (spending the profits) out and sell in 20 years. 2) Rent out the house and leave it to my children when I pass away (let's say in 20 years - for comparison). 3) Sell and invest the money over 20 years - spending 4% as income.
Who holds the mortgage?
By: nancy | 09-09-2008
1974 Littleton Road,Monroe,N.H.what bank or mortgage company holds the mortgage?what is their phone# and address?Please let me know.my e-mail is...vankleefgrammy@aol.com
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