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An FHA graduated payment mortgage also known as a GPM is an FHA insured mortgage designed for low income borrowers who are expecting to see an increase in wages. The basic principal is that the borrower starts out making very low payments to begin and depending on the graduation rate, the borrowers monthly payment will increase. The graduation rate is the rate at which the monthly payment will increase for a set amount of time. For example: If you have a 5 Year 7% graduation rate, that means your low monthly payment will increase at a rate of 7% per year for five years, until it is at the final monthly payment amount.
Graduated payment mortgages and adjustable rate mortgages may have similarities, but are very different. The difference is that a graduated payment mortgage has a set monthly payment increase, that does not change according to any other market fluctuations, with an adjustable rate mortgage on the other hand has the actual interest rate that changes according to what is known as the index.
Qualifying for the graduated payment mortgage is like all FHA loans. Although if you're getting into a GPM, your monthly payment debt to income ratio is lower which increases the amount you're able to borrow.
Note: Graduated Payment Mortgages start out at a lower rate, but once the graduation period is over the monthly payment is larger than a normal fixed rate mortgage. This is done to counter act the low initial monthly payment.
Benefits of a Graduated Payment Mortgage?
- The borrower is able to be comfortable in the mortgage they've selected simply because they are making payments that fit within their budget.
- If the increase in payments ever goes beyond the what the borrower is comfortable with, the borrower always has the choice to do an FHA streamline refinance. (One draw back is that the streamline refinance, is taking a FHA insured mortgage and refinancing it into an FHA insured fixed rate mortgage. This could be an issue if the current fixed rates that are offered put the borrower at a monthly payment that is still beyond their budget.)
- The borrower has a variety of choices when it comes to the graduation rate. The choices range from 5 year to 15 year graduation periods. The lower the year means the higher the graduation rate.
- The payment increase on a GPM will stay the same until the graduation period is over. There is no outside market fluctuation that causes a change in payments like the ARM.
Risks of the GPM
- The overall expense of the GPM is usually more than that of a normal fixed rate mortgage.
- If the borrower calculates their future earnings increase inaccurately, the borrower must then refinance into another type of mortgage and at the point the interest rates may not be as good as hoped. Although they could be good, and it could be that you just luck out.
Their are alternatives to the graduated payment mortgages such as the "Adjustable Rate Mortgages" as well as the "Fixed Rate Buydown".
