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.
