GPM Graduated Payment MortgageThe
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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