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What is a Graduated-Payment Mortgage?
Also referred to as a "GPM," a graduated-payment mortgage has low initial monthly payments that gradually increase by a predetermined percentage each year over a period of time (typically 5-15 years).

At the end of the period, the increase stops, and the borrower pays the same monthly amount.

  • advantages: This loan is attractive for borrowers that know their income will increase, but don't want to wait before getting a more expensive home.

    The key advantage of a Graduated Payment Mortgage over an ARM is that the borrower knows in advanced the schedule with which the payments will increase.

  • disadvantages: There is the possibility that anticipated increases in income won't occur.

    Also, borrowers end up paying more interest in the long run since the initial low monthly payments are not enough to pay the monthly interest, resulting in negative amortization (where the loan actually grows, even though payments are being made).

    As a result, the interest ends up being added to the principal (which in turns increases the amount of interest paid).

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