Graduated Payment Mortgage

Initially introduced by the Federal Housing Administration (FHA), the graduated payment mortgage (GPM) has lost much of its popularity.  However, related programs have been developed to better apply the GPM's basic objective.

The GPM was designed for borrowers and home buyers who anticipated future increases in their income.  This program allowed such applicants to qualify for a larger mortgage loan and, thus, a bigger home purchase.

The most common program with a similar objective today is the Temporary Buy-Down program, which lowers the interest rates during the first one-to-three years of the loan.  The applicant would then be qualified and underwritten based on the lower interest rate and monthly payment of the first year.

However, unlike the Buy-Down program, the GPM loan lowered the monthly payment but not the interest rate.  Instead the GPM adjusts the monthly payments so that the borrower pays slightly less during the first years but slightly more in later years.

Rising Payments
The monthly payments would be initially lower than conventional fixed-rate loans.  These payments rise during the first few years of the loan, until they reaching a full amortization level.

With an initially lower monthly mortgage payment, the buyer can qualify for a loan with a lower income or be able to buy a larger house.

Negative Amortization
Because of the lower initial monthly payments, there may be negative amortization during the first year(s) of the loan.  Negative amortization occurs when the scheduled payment does not cover the entire interest rate charge.  The unpaid interest is added to the principal balance, creating negative amortization.

GPM loans are not as common today for residential homeowners, because their benefits and advantages do not really offset their costs and disadvantages.  Again, most home buyers will discover that they are better off with a Temporary Buy-Down program or a standard 30-year fixed-rate loan, rather than the GPM.