Graduated Payment Method (GPM)
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consultation with our home loan experts.
The GPM is another alternative to the
conventional adjustable rate mortgage, and is making a comeback as
borrowers and mortgage companies seek alternatives to assist in qualify
for home financing.
Unlike an ARM, GPMs have a fixed note rate and payment schedule. With a
GPM the payments are usually fixed for one year at a time. Each year for
five years the payments graduate at 7.5% - 12.5% of the previous years
payment.
GPMs are available in 30 year and 15 year amortization, and for both
conforming and jumbo loans. With the graduated payments and a fixed note
rate, GPMs have scheduled negative amortization of approximately 10% -
12% of the loan amount depending on the note rate. The higher the note
rate the larger degree of negative amortization. This compares to the
possible negative amortization of a monthly adjusting ARM of 10% of the
loan amount. Both loans give the consumer the ability to pay the
additional principal and avoid the negative amortization. In contrast,
the GPM has a fixed payment schedule so the additional principal
payments reduce the term of the loan. The ARMs additional payments avoid
the negative amortization and the payments decrease while the term of
the loan remains constant.
The scheduled negative amortization on a GPM differs depending on the
amortization schedule, the note rate and the payment increases of the
loan. GPM loans with 7.5% annual payment increases offer the lowest
qualifying rate but the largest amount of negative amortization.
On a loan of $150,000, with a 30 year amortization and a note rate of
10.50% with 12.5% annual payment increases, the negative amortization
continues for 60 months. The qualifying rate is 5.75% and the negative
amortization is 11.34% (approximately $17,010).
The note rate of a GPM is traditionally
.5% to .75% higher than the note rate of a straight fixed rate mortgage.
The higher note rate and scheduled negative amortization of the GPM
makes the cost of the mortgage more expensive to the borrower in the
long run. In addition, the borrowers monthly payment can increase by as
much as 50% by the final payment adjustment.
The lower qualifying rate of the GPM can help borrowers maximize their
purchasing power, and can be useful in a market with rapid appreciation.
In markets where appreciation is moderate, and a borrower needs to move
during the scheduled negative amortization period they could create an
unpleasant situation.
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