All About Graduated Mortgage Loans

Looking for your dream home and not sure which mortgage program option is right for you? There are a lot of options available when it comes to financing your home purchase, and an experienced mortgage lender will be able to advise you on which programs may be best for you depending on your unique financial circumstances. One mortgage option you might not have heard of is what’s known as “graduated payment mortgages”.

What is a graduated payment mortgage loan?

Graduated payment mortgage loans, or a GPM loan, are mortgage loans which features lower monthly payments at the front end of the loan that gradually increase for a set period of years until you reach the final payment amount which will be due for the remainder of the lifetime of the loan.

How do graduated payment mortgages work?

Graduated payment mortgages function as their name describes: for a determined period of time your monthly mortgage payment is lower and increases on a set schedule for a certain number of years until the “lower introductory rate period” expires. For example, on a 30-year loan you may have a graduated schedule on the first 5 years of the loan. Your payment will be a low initial rate for the first year of the mortgage which will then gradually increase for the next 4 years of the loan. At the end of the first 5 years of the loan your monthly mortgage obligation will be fixed at the new amount which will be higher than it had been for the previous 5 years but which will not increase additionally each month for the remainder of your loan term.

What are the advantages and disadvantages of a graduated payment mortgage loan?

These mortgage loans are a great option for prospective homebuyers who may not have the income today to support a higher mortgage payment, but can realistically expect their income to increase over time to support a higher payment. Younger professionals starting out in their career may not be able to afford the higher monthly payment while in the first few years of building their career, but once they gain seniority and salary increases in their profession they will be able to afford the higher monthly mortgage payment. Having a graduated payment mortgage can mean more home up front than you might otherwise have been able to qualify for or afford, and may save you a move down the line when you may find yourself needing a larger home due to the addition of children to your family.

The risk to a graduated payment mortgage is overestimating your future earnings. If you purchase a home and the corresponding mortgage is one you can afford at the low initial monthly term but your prospects for job advancements and salary raises do not pan out as you had expected, you may find yourself with a monthly mortgage payment you have trouble keeping up with. However, in this case, it may be possible to refinance your loan to one that is more comfortably affordable for you and your family.