Buydown vs. GPM
While these two mortgage types start the homebuyer off at one
rate and increase the rate over time, one of these types of
mortgages may be right for you:
Buydowns - Type of mortgage loan where the loan rate is reduced
by paying more up-front at closing and is increased by one percent
each year for the period set for the loan product. For example:
For a 2-1 buydown at an 8% rate, Year 1 the rate is 6%, Year
2 the rate is 7%. For Year 3 through the life of the loan, 
the
rate is 8%.
Qualification rules for the loan programs remain
the same. Depending on the lender, though, the buyer can qualify
using the reduced rate. (Example: For a 3-2-1 Buydown at a rate
of 8%, the buyer could qualify using the 5% rate.)
The difference between the actual payment schedule
and the rate schedule is usually paid "up-front" at
closing. This can be paid by the seller, the buyer, the homebuilder,
or in some cases, the lender. If the cost is borne by the lender,
it is usually offset with increased rates or in points. Generally
the funds used to buy down the loan are held in a separate account
and are applied with the borrower's payment to equal the true
interest rate.
Graduated Payment Mortgage (GPM) - Type of mortgage loan where
the mortgage payments increase gradually for a period established
in the loan product, typically five years. This is a negatively
amortizing loan, which means that the difference between the
interest paid and the interest due is deferred and added to
the loan balances. Because of this, your loan amount will increase
once you start paying off the loan; it will amortize normally
at the end of the loan period. These loan products are more
popular when the interest rates are higher, providing a financial
incentive for potential buyers.
Since many lenders will qualify a buyer
at a lower rate, a buyer can secure a larger mortgage. These
loan types are good for those buyers who are fairly certain
that their incomes will increase to cover the increase in loan
amount.
