Graduated Payment Mortgages

A graduated payment mortgage is a type of loan where the payments increase each year for a predetermined period, such as 5 or 10 years. After this initial period, the payments become fixed for the remaining duration of the loan.

Key Points:

• Initial Low Payments: The initial payments are lower, which can help borrowers qualify more easily for the loan, especially when interest rates are high.
• Increasing Payments: Payments gradually increase each year during the initial period.
• Fixed Payments After Initial Period: Once the initial period ends, the payments remain fixed for the rest of the loan term.

Potential Downsides:

• Negative Amortization: This can occur if the initial payments are lower than the interest charged, resulting in the unpaid interest being added to the loan balance. This increases the outstanding balance of the loan.
• Higher Total Interest: Opting for lower initial payments can lead to paying more interest over the life of the loan.

Example:

• Initial Period: For the first 5 years, you might have lower monthly payments.
• Post Initial Period: After 5 years, the payments increase and then remain constant.

Benefits and Considerations:

• Qualification: Easier to qualify for initially due to lower payments.
• Equity Building: Slower equity build-up during the interest-only period.
• Long-Term Costs: Potentially higher long-term costs due to negative amortization and higher interest payments.

Graduated payment mortgages can be a useful tool, particularly in high-interest rate environments, but it's important to consider the long-term financial impact. Discussing your options with a mortgage professional can help you determine if this type of mortgage is right for you.