How Graduated Payment Mortgages (GPMs) Work

After four years of sharing a 600-square-foot studio apartment, you and your wife deserve a medal. The apartment has let you save on rent while you both work through grad school. But now that you have a baby on the way, there’s no way you can keep living here. If only your degree was going to arrive before your daughter.

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U.S. Senator Barney Frank (D-Mass.) is among the legislators currently working to reduce the number of foreclosures.

A graduated-payment mortgage (GPM) might be able to help you. Like adjustable rate mortgages and interest-only loans, GPMs were created to make home ownership possible for people to whom traditional types of financing are out of reach. As with those other types, there’s a trade-off for being able to purchase the house of your dreams.

Say that you are in law school or medical school, or you are about to embark on any potentially well-paying profession. You know that eventually you’ll have the kind of earning power to afford that four-bedroom colonial with two-car garage in the leafy suburb with good schools, but right now you come up short. At the same time, you want to take advantage of attractive selling prices while they last. Graduated mortgage payments can make it happen for you.

GPMs offer low initial monthly payments that gradually increase each year for five to 10 years until they level off at a fixed rate for the rest of the term. They’re designed for home buyers who might not otherwise qualify for the loan they need but who are confident their income will steadily increase over time. Like conventional mortgages, they’re usually for 15- or 30-year terms, and they also have a fixed interest rate, although a slightly higher one.

Read on to see what your payments would look like under various GPM plans in comparison to a conventional loan.

Restrictions on GPMs
Owners must occupy the home as their principal residence; real estate investors need not apply. They also must be purchasing a single-unit dwelling. Beyond that, there are few restrictions on who can take out this type of mortgage, although the loans were designed for low- to moderate-income buyers who expect income appreciation. This type of mortgage is also known as a Section 245 loan.