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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. |
