GPM
Graduated Payment Mortgage
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.