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 qualifying 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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