Graduated Payment Mortgage (GPM)

GPM were created to facilitate early home ownership for borrowers who expect their incomes to increase. GPM programs allow homeowners to make smaller monthly payments initially and to increase their size gradually over time. The payment starts low and rises over time. Since the initial payment is used to qualify the borrower, the GPM may allow a borrower to qualify who would not qualify with a standard fixed-rate mortgage (FRM).

Unlike an Adjustable Rate Mortgage, GPMs have a fixed note 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.

GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo loans. With the graduated payments and a fixed note rate, GPMs have scheduled negative amortization of approximately 10% - 12% of the loan amount depending on the note rate. The higher the note rate the larger degree of negative amortization. This compares to the possible negative amortization of a monthly adjusting ARM of 10% of the loan amount. Both loans give the consumer the ability to pay the additional principal and avoid the negative amortization. In contrast, the GPM has a fixed payment schedule so the additional principal payments reduce the term of the loan. The ARMs additional payments avoid the negative amortization and the payments decrease while the term of the loan remains constant.

Advantages: With this product, the homeowner can take advantage of lower interest rates without paying costs associated with refinancing when they choose to convert. The advantage of GRMs allows buyers to finance a larger loan with expectations to pay higher monthly payments over the next 5 to 7 years before leveling off at a fixed payment for the remaining term of the loan.

Disadvantages: Though a lower initial payments allow you to qualify for a larger loan amount, but the monthly payments will eventually be higher in order to catch up from the lower payments. In fact, you have to pay off the principal at an accelerated pace through the later years.