Graduated Payment Mortgage
(GPM)
The GPM is another alternative to the conventional adjustable
rate mortgage, and is making a comeback as borrowers and mortgage
companies seek alternatives to assist in qualify for home financing
Unlike an ARM, 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.
The scheduled negative amortization on a GPM
differs depending on the amortization schedule, the note rate
and the payment increases of the loan. GPM loans with 7.5% annual
payment increases offer the lowest qualifying rate but the largest
amount of negative amortization.
On a loan of $150,000, with a 30 year amortization
and a note rate of 10.50% with 12.5% annual payment increases,
the negative amortization continues for 60 months. The qualifying
rate is 5.75% and the negative amortization is 11.34% (approximately
$17,010).
The note rate of a GPM is traditionally .5% to
.75% higher than the note rate of a straight fixed rate mortgage.
The higher note rate and scheduled negative amortization of
the GPM makes the cost of the mortgage more expensive to the
borrower in the long run. In addition, the borrowers monthly
payment can increase by as much as 50% by the final payment
adjustment.
The lower qualifying rate of the GPM can help
borrowers maximize their purchasing power, and can be useful
in a market with rapid appreciation. In markets where appreciation
is moderate, and a borrower needs to move during the scheduled
negative amortization period they could create an unpleasant
situation.
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