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How Growing Equity Mortgages (GEMs) Work


Advantages and Disadvantages with Growing Equity Mortgages (GEMs)
As the number of foreclosures mounts due to the downturn in the economy, real estate disposition companies must deal with homes that have been foreclosed on and are in need of repair.
As the number of foreclosures mounts due to the downturn in the economy, real estate disposition companies must deal with homes that have been foreclosed on and are in need of repair.
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Just as the name says, growing equity mortgages or GEMs are beneficial because they grow equity quicker than traditional mortgages. A homeowner may even pay off her mortgages in half the time, and she'll pay significantly less interest because of the higher payments and decreased loan length.

GEMs also have the advantage over graduated-payment mortgages or GPMs. GEMs and GPMs both start with lower payments and increase. GPM payments are so small that they generally don't even cover all of the interest that's owed each month. GPM borrowers are building more debt, which leads to negative amortization. A GEM's lack of negative amortization makes it much more attractive in the long term -- if a borrower can afford it.

Between the shortened term and the total money saved, it seems like more people should be using a GEM. There is really only one drawback to a GEM, but it's a big one. With any mortgage there is always the possibility that sometime in the future the borrower won't be able to make the payments. Maybe the borrower loses a job or changes careers, and can no longer afford to pay the mortgage. With a GEM, this threat is compounded. Not only does the borrower have to keep making payments, but the payments keep getting larger. Being unable to keep up could cause a borrower to end up in foreclosure.

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Not only does someone have to continue making money, but they need to continue making more money. A GEM borrower's earnings must outpace the cost of living. His or her job needs to continue paying more through raises and promotions. Even if the borrower's salary increases, it may not be enough to keep up with the payments. Or, if the GEM monthly payment increases are based on the U.S. Commerce Department Index, the index could suddenly rise more drastically than anticipated. And if the borrower can't keep up with those payments, he or she could lose the house. GEMs can be beneficial, but borrowers should consider the risks.

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