The Benefits and Pitfalls of a Graduated Payment Mortgage Loan

A graduated payment mortgage loan is a unique lending instrument that is available to certain borrowers. With a graduated payment plan, your payment starts out low. Then as your earning power increases, the payments rise over time. This can be very beneficial to the right person. While it can be a good program, it is not without its drawbacks as well. Here are a few benefits and pitfalls of a graduated payment mortgage loan. 

Benefits of Graduated Payment Mortgage Loans

  • Low initial payment- The biggest benefit of a graduated payment mortgage loan is the low initial monthly payment. This can be very beneficial to those that are just starting out in their professional lives. When you plan on making more money in the future than you do now, this can be extremely helpful. For example, if you are in medical school to become a doctor. You know that you will be making much more money in the near future but right now you do not make enough to afford the regular mortgage.
  • Faster access- With a graduated payment mortgage loan, you can gain access to the house that you want now instead of waiting on it. Without the graduated payment mortgage loan, the payment would be much to high for you to afford the house that you want. However, with the graduated payment system, you can work your way up to the highest payment over time.
  • Slow increases- With most graduated plans, they will slowly raise the payment so that you can get used to the difference. For example, they may only raise your payment by 7% per year after the first 5 years of the loan. This will allow you plenty of time to increase your income and get rid of some debt along the way. 

Pitfalls of Graduated Payment Mortgage Loans

  • More obligation- The biggest problem with graduated payment mortgage plans is that you can over-obligate yourself. You get a graduated mortgage plan with the assumption that your income is going to go up. When you do this, you are basically betting on the future. When the future doesn't work out the way you want it to, you could have serious problems. For example, let's say that you are in medical school with the impression that you are going to be a doctor. Then someone in your family grows very ill and you have to drop out of school to take care of them. You no longer have your inside track to making more money but you still have the payments on your house getting bigger as you go.
  • Payments get harder- Another bad thing about graduated mortgage plans is that they get worse as you go along. The easiest time is at the beginning of the loan when you first get started. As you pay your payments, the payments just keep getting bigger. This makes it kind of discouraging as it feels like you are not making any progress.