Understanding the Graduated Payment Mortgage Loan: Key Insights
Definition & Meaning
A graduated payment mortgage loan is a type of home loan designed for purchasing a single-family home. This loan features a repayment plan where a portion of the interest is deferred for a specific period. As a result, the initial monthly payments are lower, but they gradually increase over time until they reach a level that fully amortizes the loan by the end of its term. This means that the total amount owed can be higher than the original loan amount due to negative amortization, where deferred interest is added to the principal balance.
Legal Use & context
Graduated payment mortgage loans are primarily used in real estate transactions. They are relevant in areas of law related to finance, real estate, and consumer protection. Legal professionals may encounter these loans when advising clients on mortgage options or during the drafting of real estate contracts. Users can manage some aspects of this process themselves by utilizing legal templates available through services like US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A borrower takes out a graduated payment mortgage loan for $200,000. For the first five years, they pay only interest, which is lower than standard payments. After five years, their payments increase annually until they reach a level that will pay off the loan in 30 years.
Example 2: A family purchases their first home with a graduated payment mortgage loan. They start with lower payments while their income is limited, and as their earnings increase, their payments also rise accordingly to ensure they can afford the home long-term. (hypothetical example)