So, you want to buy a new home, but your income is not supporting your dreams. You will have to take the help of a mortgage. While there are lots of mortgage plans, a graduated-payment mortgage could be the best for you.
Graduated payment mortgages (GPMs) are a home loan type with an amortization schedule, where the payments increase gradually over a predetermined period, usually 3, 5, or 7 years. This fixed-rate mortgage sees its payments increase gradually to a higher final level from an initial low base level - often between 7 – 12% every year until the maximum payment amount is reached. This continues for the whole tenure of the loan.
Graduated payment mortgages are self-amortizing mortgages with a variable monthly payment but a set interest rate. A GPM is a loan kind that defies logic but may yet be advantageous to certain borrowers. It is an attractive alternative for borrowers who anticipate higher wages in the future but for whatever reasons cannot fulfil the debt-to-income standards to qualify for a loan presently. GPMs are often guaranteed by the Federal Housing Administration (FHA).
Being self-amortizing loans, GPM debt is fully repaid after the loan term end and the borrower must pay both an upfront and yearly payment for mortgage insurance. The GPM plans consist of:
● A 10-year initial period, at 2% or 3% graduation.
● A 5-year initial period, at 2.5%, 5% or 7.5% graduation.
A graduated payment mortgage is designed to start with the homeowner owing minimum payments, with a gradual increase as mentioned earlier. The buyer is eligible if they have a low initial interest rate - this is beneficial for many who might not otherwise be qualified for a home mortgage. Given that their income levels tend to increase gradually, young or first-time homeowners benefit most from this type of mortgage payment structure.
Borrowers must meet certain criteria to get the GPM:
● The loan should be taken for a single-unit owner-occupied property.
● Borrowers must pay at least a 3.5% down payment.
● Payment of FHA mortgage insurance premiums is mandatory.
This type of mortgage might or might not have negative amortization. This indicates that the initial payment will be less than the interest that will be charged on the mortgage loan. The borrower payments, in a loan with negative amortization, are less than the interest charged on the loan. This lower-than-interest payment structure paves the way for deferred interest which adds to the total principal of the loan.
