A graduated payment mortgage allows you to stretch your mortgage dollars. It lets you purchase a more expensive property than you normally would. This type of mortgage can have its advantages and disadvantages. The advantage is clearly the lower initial monthly payment. The disadvantage is that you will end up with a higher payment later on. This may be something that you can handle in the future as your income rises over time. Interest-Only Graduated Payment Mortgages The lower initial payment the borrower makes can be for several reasons. The initial payment may be interest only. This type of loan means that the loan principal is not being paid down. This means that at whatever point the loan needs to start being paid down it will be done so over the remaining loan term. For example, if you can make a lower interest-only payment for the first 5 years of a 30 year loan then after the initial 5 year period you will need to start paying down the loan over the remaining 25 years. The loan math is amortized over the remaining 25 years, so the payment will be higher. Negative Amortization Graduated Payment Mortgages Another type of lower initial payment is the negative amortization loan. An example of this is a loan where someone can pay less than the interest only loan amount. This is a "minimum payment" loan option. Any shortfall in payment below the interest only level is added onto the principal of the loan. As such, the loan balance actually increases over time. Because the loan is actually increasing in size over time rather than declining, the loan has "negative amortization". For some borrowers this may still be appropriate if the property increases in value at a higher rate than the loan increases in size. For example, if a loan size is $450,000 and the house is worth $500,000, after one year the loan balance may be $460,000 but the property value is $550,000. The equity in the property has increased from $50,000 to $90,000. |
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