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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