What Is a Growing-Equity Mortgage (GEM)?
In a growing-equity mortgage (GEM), the monthly payments rise over time in accordance with a predetermined schedule as opposed to being constant and equal throughout the loan period. There is never a negative amortization on the loan, nor does the interest rate alter. Instead, the initial payment is a completely amortizing payment, and when the payment amount rises over time, the extra money is added straight to the outstanding mortgage balance, cutting the loan’s term and boosting total interest savings.
- In a growing-equity mortgage (GEM), extra principle payments are pre-scheduled and rise over time, often at 5% a year. This is a variant on a fixed-rate mortgage.
- The extra payments make it possible to pay off the mortgage more quickly and with less overall interest payments.
- The FHA provides GEM loans, where the FHA will guarantee the lender against losses, to borrowers who have a strong potential for earnings development that can handle gradually rising payments.
How Growing-Equity Mortgages Work
By planning extra principle payments that rise over time, a growing-equity mortgage effectively enables a borrower to accelerate repayment of their fixed-rate mortgage. A growing-equity mortgage aims to build up home equity quicker so that the borrower may use it as collateral if necessary in addition to helping to pay off the debt early. Growth-equity mortgage payments generally increase yearly, by up to 5% annually.
This kind of funding has one restriction. Homeowners’ incomes (or their capacity to pay) must rise in order to cover the bigger payments since payment levels rise every year.
A progressive payment mortgage should not be confused with a growing-equity mortgage. In addition to having a fixed interest rate, a progressive payment mortgage also involves payments that rise at predetermined intervals. Mortgages with graded payments may also experience negative amortization. In contrast to a growing-equity mortgage, a graded payment mortgage sets its starting installments below what a fully amortizing payment would be (they are actually set below what an interest-only payment would be).Not interest savings, but negative amortization results from this.
Other Considerations for GEMs
With equivalent credit standards, qualifying for a growing-equity mortgage might be similar to applying for other mortgage types. With this kind of mortgage, opportunities for lesser down payments can be available. Some lenders target first-time homebuyers who would not otherwise be able to pay up-front expenditures with growing-equity mortgages.
Additionally, these loans are made available to potential customers who would not be eligible for traditional mortgages. A growing-equity mortgage program is available from the Federal Housing Administration expressly for this use. According to FHA criteria, homeowners with low incomes who also have a good chance of seeing their income rise may qualify for increasing equity mortgages.
Lenders are protected in the event of a borrower default when these mortgages are insured by the FHA. Growing-equity mortgages are covered by FHA insurance, which also extends to refinancing and property renovation. Condominium units or cooperative housing shares may also be financed.
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