Thursday, September 10, 2009

Graduated-Payment Mortgages

The problems created by fixed-rate mortgage have led to the development of several new mortgage instruments in recent years. One which may be of at least as much help to lower-income families as to mortgage lenders is the graduated-payment mortgage (GPM), which FHA began insuring in 1977. With the GPM, initial monthly payments on new home are lower than they would be under a traditional FRM. Subsequently, payments rise, but they level off after several years. The idea is to tailor the debit-service payments on a home mortgage to the financial needs and improving financial position of the borrower. And GPMs have proven to be popular with young families who otherwise might be stymied by high mortgage payments until their earning power increased. By the end of 1980 a quarter million new GPMs ad been insured by FHA.
of course, the total amount of interest paid by the borrower will be much larger with a GPM than it would be under a conventional FRM. In Part, this occurs because the low initial monthly payments do not cover the full amount of interest owed each month, forcing the lender to actually increase the amount of the mortgage loan in the early years. Moreover, due to the delayed receipt of income, lenders generally raise the interest rate on GPMs above rates prevailing on level-payment mortgages

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