Graduated Payment Mortgages

A graduated payment mortgage starts with a low monthly payment that rises on a set schedule for a fixed number of years (often five or ten), and then levels off for the rest of the term.

The idea is to match the payment to a career where you expect to earn more later. Because the first payments are small, some buyers can qualify for a loan they couldn’t get otherwise.

The catch

In the early years, your payment can be less than the interest the loan is building up. That shortfall doesn’t go away. It gets added to what you owe. It’s called negative amortization, and it means your balance grows for a while even though you’re paying every month.

If home values stay flat during that time, you can end up owing more than the house is worth. That makes it harder to sell or refinance. The whole plan depends on your income going up the way you expect.

These loans are uncommon today. For most buyers, an FHA loan or down payment assistance solves the same affordability problem without the growing balance. Ask a loan officer to compare them side by side before you choose this one.