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How Growing Equity Mortgages (GEMs) Work

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That new house for sale down the street seems perfect -- big backyard, the right number of bedrooms and a great location. You expect a promotion in six months, but you don't have the money to pay for that home's mortgage now, and it may be sold before your new salary kicks in. A growing equity mortgage (GEM) may be the perfect answer for your situation.

A GEM is an alternative mortgage where payments increase over the life of the loan. The interest rate is fixed and the homeowner's monthly payments increase at a fixed rate -- either monthly or annually. This payment increase is applied toward the loan principal instead of the interest, as it would be in a graduated mortgage payment. This allows the mortgage to be paid off at a much quicker rate, usually in just 15 years [source: CityTownInfo].

A GEM has lower up-front payments and costs, so it's ideal for young families or first-time buyers who just launched careers and savings. Those anticipating higher future incomes are best-suited for a GEM. Payments start out small and gradually increase. This builds equity quicker so that a 30-year mortgage can be paid off in half the time with a GEM versus a traditional mortgage.

Half the time…so why isn't everyone doing this? Keep reading to find out how a GEM works, and when it's not such a great idea.