Graduated Payment Mortgages for Affordable Homeownership - HAR.com (2024)

If you are new to real estate investments, choosing a mortgage for financing will be as complicated as entering a buffet lunch, you don’t know where to start. Like the food, each mortgage has its own taste and flavor.

Some mortgage payments remain the same throughout the loan period, while you have mortgages exclusive to mid-income and veterans. Similar to these mortgages, there is the graduated payment mortgage.

What is Graduated Payment Mortgage?

This is the loan where monthly payments are low at the beginning. Every year, the monthly payments increase for a specific period. Once this period comes to an end, the lender might increase the payment to make up for the lower initial payments.

That means if you have fewer finances at the beginning or you want to save money, graduated payment mortgages can be a chilled lemonade on a hot sunny day. They can make it easier to pay the initial mortgage payments and buy home equity at less expensive prices.

How Doe Graduated Payment Mortgages Work?

If you know about the adjustable-rate mortgage, you might think that both mortgages work similarly. Yes, both have changing payments throughout the loan period, but there are certain differences as well.

One of the major ones is that while an adjustable-rate mortgage has fixed payments during the initial period, a graduated-payment mortgage which is due every month, changes annually for a specific period.

If you are still finding it challenging to fully understand the idea, here is an example to clear things up.

Let’s assume you opt for a mortgage loan of $60,000 with a 12% interest rate. The total loan term is 30 years. That means you have to pay about $617 every month on the conventional loan.

But if you add the graduated payment period of 5 years and a yearly increase of 7.5%, things will get interesting. Now, the schedule with graduated payment mortgages may look something like this:

Are you looking at this and wondering, “Why is my loan balance exceeding the loan amount?” That is because the initial payments you made were not enough for the monthly expense. That was just to ensure that you have your loan approved.

Once the initial period is done, the lender expects you to make payments and lower your loan balance. Yes, will have to pay more for the remaining 25 years, but look at how much money you can save at the beginning.

Did You Know
Negative amortization is when the initial payments are not big enough to pay for the interest rate.
The lender can increase the monthly payments after the initial period is over to cover this gap.

Requirements for Graduated Payment Mortgages?

Are you thinking of opting for graduated payment mortgages as your next home financing method? For that, first, you will need to meet certain requirements and criteria. Here are some you might want to know about.

• Down payments of 3.5% or more.
• Pay the insurance premium if you have an FHA mortgage.
• Financing a single-unit, owner-occupied property.

Now, let’s look at some additional factors that your lender may consider when deciding whether to approve your loan or not:

• Employment History: You need to have consistent employment for a stable income.
• Debt to Income Ratio: Keep your DTI ratio low to display your ability to manage loans.
• Credit Score: Have a healthy credit score to demonstrate that you can pay back debt.

Advantages and Disadvantages of Graduate Payment Mortgage

After seeing what graduated payments loans are, one of the important things left would be to know the benefits you can take advantage of, followed by some potential downsides.

That will help you make profitable decisions.

Benefits of Graduated Payment Mortgages

Initial Savings

Since your monthly payments for the starting years will be lower, this can be the perfect opportunity to save money for future expenses.

You can either invest the savings for future returns, use them for home improvements to enhance your home value, or (think long-term) save them for when your monthly payments rise.

Lesser Upfront Payment

When you hear the word Mortgages, one of the first things that may come to your mind is the initial investments. Down payments are one of the most expensive upfront expenses, which may turn out to be a massive headache for aspiring homeowners.

But as we have mentioned earlier, there will not be a need to make a large down payment. Lenders usually approve the graduate payment loan for 3.5% down payments. That means you don’t have to go for another mortgage option just because you cannot afford the upfront expense.

Larger Loans

Walt Disney said, “If you can dream it, you can do it.” But when if you dream of buying a high-priced property, you might not be able to do it with most of the mortgages available.

That is where you need graduate payment mortgages to realize your dreams. These graduated payment mortgages usually have a large loan limit as compared to many other types of mortgages and can meet your financing needs.

So, instead of changing your dreams, change your mortgage option and switch to the graduated payment loan.

Disadvantages of Graduated Payment Mortgages

Increased Total Cost

After enjoying the low mortgage payments at the start, you will ultimately have to pay a higher amount than a conventional mortgage. This will be to cover the difference between the initial years and actual payments, which was not enough to buy home equity and led to negative amortization.

Expecting an Income Increase

None of us have a crystal bowl to know what the future holds. So, when you say your fortunes are about to change and your income will increase after the initial years of the loan, that’s a possibility you are counting on.

If something unexpected happens and your assumption does not come true, it may impact your mortgage affordability. Not making on-time mortgage payments may lead to home foreclosure.

Early Payment Penalties

As you are reading this, are you wondering, “I will pay extra during the initial period to reduce the burden later on?”

That is a good plan. The only hurdle would be that the lender will not be too pleased with you doing it. This may lead to an early payment penalty, which can cost you a lot.

Make sure to read the graduated payment mortgage agreement and see if there is a prepayment penalty clause mentioned.

The Bottom Line

Are you ready for a trade-off by paying an extra total price for reduced initial mortgage payments? If so, find yourself a lender to finance your next home.

Yet to find a property that meets your preferences? Visit HAR.com and contact our award-winning real estate agents.