Growing-Equity Mortgage
Candlefocus EditorThe Federal Housing Administration (FHA) offers GEM loans to borrowers who are highly likely to increase their earnings over time, ensuring that they have the capacity to make the larger payments associated with the GEM loan. By doing so, the FHA insures the lender against default.
The GEM plan is an advantageous way to reduce both the length of the loan and the total interest paid. A great benefit of the GEM plan is that it allows borrowers to pay down their mortgage principal faster without devoting any additional funds to the loan regimen. Instead, through the pre-scheduled larger monthly payments, the loan is simply paid off quicker and at lower cost.
Also, since the payments are made in regular, progressive amounts, the loan amount is reduced in gradual, manageable stages which won't put the borrower under a sudden, dramatic strain. Still, GEM plans are not for everyone. Borrowers need to consider that their repayment obligations will rise steadily over time, and if their income does not meet these increasing payments, their default risk increases considerably.
It’s also important to note that the FHA will insure up to 97% of the loan value on the GEM loan, making it more affordable than other loan types. In conclusion, the Growing-Equity Mortgage can be a great solution to lowering the term and interest payments on a long-term loan. It offers the advantage of regular incremental payments allowing the loan to be paid off quicker and with reductions in total interest due. Borrowers must carefully consider their future prospects and income potential to ensure that they can make the larger payments when they become due.