U.S. Government Printing Office
Superintendent of Documents, Mail Stop:
SSOP, Washington, DC 20402-9328
Federal Trade Commission
Fixed interest rate; payments rise gradually for first few years, then level off for duration of loan.
Even though the payments change, the interest rate is usually fixed. So during the early years, your payments are lower than the amount dictated by the interest rate. During the later years, the difference is made up by higher payments. At the end of the loan, you will have paid off your entire debt.
One variation of the GPM is the graduated payment, adjustable rate mortgage. This loan also has graduated payments early in the loan. But, like other adjustable rate loans, it ties your interest rate to changes in an agreed-upon index. If interest rates climb quickly, greater negative amortization occurs during the period when payments are low. If rates continue to climb after that initial period, the payments will, too. This variation adds increased risk for the buyer. But if interest rates decline during the life of the loan, your payments may as well.
Growing Equity MortgageFixed interest rate, but payments may rise according to agreed-upon schedule or an index. Increases are applied to principal, shortening term of loan.The growing equity mortgage (GEM) and the rapid payoff mortgage are among the other plans on the market. These mortgages combine a fixed interest rate with a changing monthly payment. The interest rate is usually a few percentage points below market. Although the mortgage term may run for 30 years, the loan will frequently be paid off in less than 15 years because payment increases are applied entirely to the principal. Monthly payment changes are based on an agreed-upon schedule of increases or an index. For example, the plan might use the U.S. Commerce Department index that measures after-tax, per capita income, and your payments might increase at a specified portion of the change in this index, say 75%. Suppose you're paying $500 per month. In this example, if the index increases by 8%, you will have to pay 75 % of that, or 6 %, additional. Your payments will increase to $530, and the additional $30 you pay will be used to reduce your principal. With this approach, your income must be able to keep pace with the increased payments. The plan does not offer long-term tax deductions. However, it can permit you to pay off your loan and acquire equity rapidly.
© Copyright Federal Trade Commission 6th & Pennsylvania Avenue, N.W. Washington, DC 20580 (202) 326-2222 |