Graduated Payment Mortgage (GPM)
Candlefocus EditorOne of the main advantages of a GPM is the lower starting payment. Borrowers who may not have the income needed to qualify for a standard fixed-rate mortgage may be able to qualify for a GPM. This type of loan allows those with fluctuating income, such as the self-employed, to buy a home.
The disadvantage of a GPM loan is the total cost over the life of the loan is greater than that of a standard loan. This is because of the increasing payments over time. Limiting performance issues are inherent in this type of mortgage since the payments increase as the economy changes. That makes the GPM susceptible to delinquencies and default if an unexpected economic shock derails a household’s plans. Homeowners should plan ahead to avoid being caught unawares by the increasing payments on their GPM.
Ultimately a GPM can be a great option for those who may not have the immediately available income to qualify for a standard loan. It allows financial flexibility in the early years as payments increase slowly and not hit the full amount right away. However, to use this type of loan wisely it must be done so with planning in mind so that borrowers are not stuck with unmanageable payments toward the end of the life of the loan.