A Graduated Payment Mortgage (GPM) allows homebuyers to start with lower monthly payments that increase predictably each year for a period, usually five to ten years, before leveling off for the remainder of the loan term. This structure is ideal for borrowers who anticipate their income to grow steadily over time, such as young professionals early in their careers.
Because initial payments may be less than the interest accrued, GPMs often involve negative amortization — where unpaid interest is added to the principal loan balance. For example, if your monthly interest is $1,500 but the payment is only $1,200, the unpaid $300 is added to your loan, increasing your debt initially. This means the total amount owed can rise before eventually decreasing once payments increase enough to cover interest and principal.
Borrowers suited for a GPM usually have a clear expectation of increased earnings within a few years. This might include recent graduates entering high-growth professions, such as doctors or engineers, who struggle to afford standard mortgage payments initially. The U.S. Department of Housing and Urban Development (HUD) supports FHA-insured GPM loans through programs like Section 245(a), which target buyers with expected income growth over five to ten years (HUD GPM Program).
GPMs provide benefits including lower initial payments, the ability to purchase a home sooner, and predictable payment increases. However, risks include negative amortization, a higher overall loan cost due to additional interest, slower equity build-up, and potential difficulties if expected income rises do not materialize.
Common misconceptions include confusing GPMs with Adjustable-Rate Mortgages (ARMs) — unlike ARMs, GPM payments rise on a set schedule and the interest rate usually remains fixed. Additionally, payment amounts in a GPM do not decrease after the increase period ends but stay constant.
If the borrower’s income fails to increase as planned, they may face unaffordable payments, increasing the chance of default or foreclosure, so GPMs require careful financial planning.
For further reading, learn more about negative amortization or explore other loan options such as the FHA Loan for government-backed mortgage programs.
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