Many people believe that home loans fall into one of two major categories — they’re either fixed-rate mortgages or adjustable-rate mortgages. And while that’s not inaccurate, it really doesn’t paint the right picture of the lending industry.
Lenders offer a range of financing solutions and unique home loan options. One of the lesser-known alternatives is called a graduated payment mortgage (GPM). Here, the professional team at Intercap Lending explains the ins and outs of this type of loan.
How Does a Graduated Payment Mortgage Work?
With a GPM, you start out making reduced monthly payments – and the amount due stays low for the first year. After that, your mortgage payments will rise on an annual basis until the amount reaches the maximum specified in the loan agreement. In most cases, the increase is between 7 and 12 percent each year.
How Do Graduated Payment and Adjustable-Rate Mortgages Differ?
Due to the shifting in monthly payment amounts, a GPM might seem much like an adjustable-rate mortgage. However, GPMs actually have a fixed interest rate – the payment changes are unrelated to market. Once this type of home loan is fully amortized, the amount due remains the same. With an adjustable-rate mortgage, payments can fluctuate for the life of the loan.
Who Can Benefit from a Graduated Payment Mortgage?
First-time homebuyers often choose GPMs, as the low initial payments are easy on the budget – and because of this, borrowers with lower incomes are better able to qualify for financing. But a GPM isn’t the right lending solution for everyone, and some who take out these home loans can’t afford the fully amortized payments.
Is Refinancing an Option with this Type of Mortgage?
There is no hard-and-fast rule that states you cannot refinance a GPM to secure a lower monthly mortgage payment or better interest rate. But, you’ll need to review your home loan agreement to be sure – some mortgage lenders charge fees for refinancing a GPM or terminating the loan before the full repayment period ends.
Should you consider a GPM? If you’re just starting out on your career path, moving into a higher-paying job or expecting a salary increase in the not-so-distant future, taking out a GPM could be to your benefit. But, since there’s no guarantee that your income will increase in step with the annual mortgage payment bumps, you’d be wise to explore all of your home financing options.
At Intercap Lending, we make shopping for the ideal mortgage easy on Utah homebuyers. With us, you can compare the rates, terms and loan options offered by multiple mortgage lenders to ensure you walk away with the best deal on home financing.
For more information on graduated payment mortgages and assistance in finding your ideal Utah home loan solution, contact Intercap Lending in Orem today.