The GPM is another alternative to the conventional
adjustable rate mortgage, and is making a comeback
as borrowers and mortgage companies seek alternatives
to assist in qualify for home financing.
Unlike an ARM, GPMs have a fixed note rate
and payment schedule. With a GPM the payments
are usually fixed for one year at a time. Each
year for five years the payments graduate at
7.5% - 12.5% of the previous years payment.
GPMs are available in 30 year and 15 year amortization,
and for both conforming and jumbo loans. With
the graduated payments and a fixed note rate,
GPMs have scheduled negative amortization of
approximately 10% - 12% of the loan amount
depending on the note rate. The higher the
note rate the larger degree of negative amortization.
This compares to the possible negative amortization
of a monthly adjusting ARM of 10% of the loan
amount. Both loans give the consumer the ability
to pay the additional principal and avoid the
negative amortization. In contrast, the GPM
has a fixed payment schedule so the additional
principal payments reduce the term of the loan.
The ARMs additional payments avoid the negative
amortization and the payments decrease while
the term of the loan remains constant.
The scheduled negative amortization on a GPM
differs depending on the amortization schedule,
the note rate and the payment increases of
the loan. GPM loans with 7.5% annual payment
increases offer the lowest qualifying rate
but the largest amount of negative amortization.
On a loan of $150,000, with a 30 year amortization
and a note rate of 10.50% with 12.5% annual
payment increases, the negative amortization
continues for 60 months. The qualifying rate
is 5.75% and the negative amortization is 11.34%
(approximately $17,010).
The note rate of a GPM is traditionally .5%
to .75% higher than the note rate of a straight
fixed rate mortgage. The higher note rate and
scheduled negative amortization of the GPM
makes the cost of the mortgage more expensive
to the borrower in the long run. In addition,
the borrowers monthly payment can increase
by as much as 50% by the final payment adjustment.
The lower qualifying rate of the GPM can help
borrowers maximize their purchasing power,
and can be useful in a market with rapid appreciation.
In markets where appreciation is moderate,
and a borrower needs to move during the scheduled
negative amortization period they could create
an unpleasant situation.
