Question

1. Mari and Judy have just graduated from college and are purchasing a condominium. They expect that their incomes will be increasing in the next few years. Should they consider a graduated payment or graduated equity mortgage? What are the pros and cons?

2. Alberto and Maureen have just bought their first condominium. They plan on staying in the condo for about five years and then buying a house. What type of mortgage loan would you advise them to get?

Answer 1

1) Graduated Payment Mortgage (GPM) is the mortgage with low initial monthly payments which increase with the period of time. It is meant for the individuals who can’t afford the huge monthly payments now but will be able to afford in future. It includes negative amortisation.

Pros of GPM:

1. It supports the home purchase at early point in life due to small monthly payments initially.
2. It leads to greater buying power as the expensive house can also be purchased with this facility.
3. The borrowers with low credit scores may also avail this facility.

Cons of GPM:

1. It is based on the assumption that income will rise in future. If the income level in future is not up to the mark, the future payments may be difficult.
2. The cost of this loan is higher as compared to other types of loan.

Graduated Equity mortgage (GEM) is the loan at fixed rate in which the monthly payments increase over time and there is no negative amortization.

Pros of GEM:

1. It does not have negative amortization.
2. It is easy for the borrowers to afford this loan

Cons of GEM:

1. The future payment keeps on increasing with time which is sometimes difficult to pay for the borrowers.
2. The non payment of the loan leads to foreclosure

Amongst two options, the Gem is much better than GPM as GPM hardly able to cover the interest with monthly payment.

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2) The couple may opt the Graduated Equity mortgage for the purchase of condo. The value of condo may rise at the rate of 2-3% per year. The couple may look forward to another loan after five years when purchasing a house and several options are available like fixed rate mortgage, adjustable mortgage, conventional mortgage, Jumbo mortgage etc.