What Is A Graduated Payment Mortgage In Real Estate?

In the real estate business context, diverse mortgage options exist. As House Digest previously reported, two popular mortgage types in the United States include the fixed interest rate mortgage and the adjustable interest rate mortgage. At the same time, another home loan options is called a graduated payment mortgage. For a graduated payment mortgage, the interest rate remains fixed, as Investopedia detailed. However, this type of mortgage comes with another condition: Gradually, the payments begin increasing. Because the monthly payment starts at a decreased base level and escalates over time, by the end of the series, the payment amount can be much higher than it was at the outset. Accordingly, this loan structure can signal both benefits and burdens for prospective homebuyers who want to use this type of financing. 

Typically, under a graduated payment mortgage structure, the payments will increase by 7% to 12% each year. The first mortgage payment can also be considered a foundational or base payment. For homebuyers who purchase property through this mortgage structure, a specific timeline governs their loan payment schedule. The timeline for this payment schedule is also known as an amortization schedule. As Investopedia explained, amortization reflects an accounting principle, which describes a pattern of decreasing a loan's book value.

What to expect with graduated payment mortgages

In a general sense, this accounting principle may also reflect the value of an intangible asset during a certain period of time (hence the schedule). In the context of a home loan though, the homeowner's amortization schedule spreads her payments out. For context, Investopedia elaborated on the concept of amortization by way of analogy. The publication described it as being theoretically similar to depreciation in value for a specific asset. For example, a new car is an asset. While the car is an asset, the vehicle may will also (generally) decrease in economic value from the moment it leaves the lot. At the same time, the psychological and social value of the asset can be harder to quantify.

For some people, the graduated payment mortgage structure may appeal because these arrangements are designed to attract homebuyers who seek lower initial payments — who do so for a myriad of reasons. As indicated earlier though, these payment amounts will and do increase.