What Is a Graduated Payment Mortgage?

A graduated payment mortgage (GPM) begins with a lower payment that increases over time. You might, for example, start out with a payment, but it increases by 3% a year for the next ten years. The lower payments can allow you to rebuild your savings after making a down payment, or do some much-needed home repairs if you bought a "fixer-upper."

The trade-off for the low initial payments, and where some borrowers get into trouble, is that the payments in later years are significantly higher. A GPM on ,000 at 6.5% starts with a payment of just , but gradually increases to after 5 years.

Despite that, borrowers are qualified on the lower payments. This may not be an issue if you're only planning to stay in the home for a few years. But if you intend to stay in this home for a while, you need to carefully consider whether or not your budget can handle the increased payments.

You'll pay a slightly higher interest rate on this type of loan as well, because it's riskier for the lender. Payments are lower at the start of a GPM because you're not paying the interest. Consequently, your loan balance increases for the first few years, and may exceed the appraised value of the home. If you default on the loan at this point, the lender looses money.

Because of the risk for both you and the lender, we recommend considering other options first.