Question

Brenda Borrow is considering a loan so that she can finance the
purchase of Real Estate. Brenda has researched the fact that a Fully
Amortized Mortgage real estate loan for a period of 30 years will
obligate her to pay $1400 per month over the life of the loan.
Brenda cannot afford the $1400 per month payment - not yet
anyway. Perhaps later - when her job begins paying her more
salary - she could afford the $1400 per month payment. Now
Brenda can only afford to pay $1100 per month. Brenda has been
told of an arrangement called a "Graduated Payment Mortgage."   
Discuss the concept of a "Graduated Payment Mortgage." Discuss
the mechanics of the loan and discuss the pitfalls of the loan.   
Compare the "Graduated Payment Mortgage" with the "Fully
Amortized Mortgage." Advise Brenda regarding the selection of the
mortgage type.

Answer 1

A graduated payment mortgage (GPM) is that type of fixed-rate mortgage in which payments for the mortgage will increase in a gradual manner. It will start from a low initial base and then will increase in a gradual manner over the period of time for which the mortgage has been taken. On the other hand a fully amortized mortgage requires a constant periodic payment of both principal and interest over the term of the mortgage.

In this case I would advise Brenda to consider opting for a graduated payment mortgage. This is because she is not able to pay the amount of $1,400 per month now she can make use of the graduated payment mortgage to pay smaller amounts initially. Once her job begins and she starts earning she can start paying more. This way the graduated payment mortgage will allow her to pay lower amounts initially and this will suit her well as currently her job has not started and hence her ability to pay is low.