Graduated payment mortgage

A ‌Graduated‌ payment‌ mortgage, often shortened to GPM, is a ‌special‌ form of loan ‌where‌ the repayment terms are modified to start with low initial payments that gradually increase over a certain period. This type of mortgage is mainly designed for borrowers who expect their income to rise in the future.

The Mechanics of a Graduated Payment Mortgage

In a graduated payment mortgage, the initial payments are typically set at a level that is lower than a standard mortgage. The payments then gradually rise, usually annually, over a specified period - often five to ten years. After the graduated period ends, the payments then level off and remain constant for the remaining term of the loan.

Benefits of a Graduated Payment Mortgage

One of the main benefits of a graduated payment mortgage is that it allows borrowers with lower income to qualify for a larger loan. This is because the initial payments are set lower than they would be with a regular mortgage. This is particularly beneficial for people early in their careers, who expect their income to rise over time.

Risks Associated with Graduated Payment Mortgage

While a graduated payment mortgage has its benefits, it also comes with its share of risks. The primary risk is that the borrower's income does not rise as expected. In such a case, the increasing loan payments can become challenging to manage. Additionally, during the early years of the loan, the low payments often do not cover the interest. This leads to "negative amortization" - a situation where the loan balance can actually grow rather than decrease, even while payments are being made.

GPM and Trading

In the context of trading, graduated payment mortgages can impact the overall health of the real estate market, which, in turn, affects securities tied to the housing market, such as mortgage-backed securities. Therefore, understanding GPMs can give traders insights on market trends and potential investment risks and returns.