Graduated and Balloon Payment Mortgages
Introduction
When it comes to financing a home, there are various types of mortgages available to borrowers. Two lesser-known options are graduated payment mortgages (GPMs) and balloon payment mortgages. These types of mortgages offer unique repayment structures that may be beneficial for certain borrowers. Let's take a closer look at what each type entails:
Graduated Payment Mortgages (GPMs)
A graduated payment mortgage is a type of mortgage where the borrower's monthly payments start low and gradually increase over time. This gradual increase in payments allows borrowers to ease into higher payments as their income potentially grows. GPMs typically have a fixed interest rate and a designated period (usually 5 to 10 years) where the payments increase at set intervals.
One advantage of a GPM is that it can be beneficial for borrowers who expect their income to increase steadily over time. This type of mortgage allows borrowers to afford a higher-priced home with lower initial payments. However, it's important for borrowers to be aware that the payments will increase over time, so they should plan accordingly.
Balloon Payment Mortgages
A balloon payment mortgage is a type of mortgage where the borrower makes relatively small monthly payments for a specified period (usually 5 to 7 years), after which a large "balloon" payment is due. This final balloon payment is significantly larger than the regular monthly payments and typically covers the remaining balance of the loan.
Balloon payment mortgages are often used by borrowers who plan to sell or refinance the property before the balloon payment is due. This can be advantageous for borrowers who anticipate a significant increase in income or property value in the future. However, if borrowers are unable to make the balloon payment when it comes due, they may need to refinance the loan or sell the property to cover the remaining balance.
Conclusion
In conclusion, graduated payment mortgages and balloon payment mortgages offer unique repayment structures that may be suitable for certain borrowers. GPMs allow borrowers to start with lower payments that gradually increase over time, while balloon payment mortgages involve smaller payments upfront with a large final payment due at the end of the term. When considering these types of mortgages, borrowers should carefully assess their financial situation and long-term plans to determine which option is the best fit for their needs.