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.
