Interest Only Mortgage Consider A Graduated Payment Mortgage
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Considering a Graduated Payment Mortgage Over Interest-Only Options
Overview
Graduated Payment Mortgages (GPMs) provide a strategic financing option for those anticipating an increase in income. Functioning as a hybrid between adjustable-rate and fixed-rate mortgages, GPMs start with low payments that rise annually according to loan terms. If you've been contemplating an interest-only mortgage, it might be worth exploring the advantages of a GPM.
Features of a GPM
GPMs begin with affordable monthly payments that progressively increase over the loan's duration. Initially, these payments may not entirely cover the interest (leading to negative amortization), but they increase later to include both interest and principal.
Typically, the initial payments in a GPM are a few hundred dollars lower than those of a comparable fixed-rate mortgage. However, you can anticipate paying at least a hundred dollars more per month in later years compared to a fixed-rate option.
Lenders offer various payment plans, with the most common being an annual increase in payments for the first seven years, after which they stabilize. Extending this graduated period or increasing the rate of payment growth can further reduce initial costs.
Benefits of GPMs
GPMs offer the dual benefits of low early payments and the security of a fixed mortgage rate. They cater to homeowners expecting income growth, often due to inflation. As your income rises, the mortgage payments adjust accordingly.
This structure enhances purchasing power since the reduced initial payments free up funds for moving expenses and home furnishings.
Drawbacks of GPMs
As with any mortgage, it's crucial to carefully weigh the pros and cons of a GPM. One risk is the potential inability to manage increased payments in future years, which could strain your finances.
Additionally, should you relocate shortly after purchasing the home, negative amortization might mean owing more on the loan after sale. Even if you avoid interest debt, building equity will be slow in the initial years.
Examine your financial goals alongside various financing options to determine the most suitable choice.
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