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 Graduated

Graduated Mortgage Financing Sources

A graduated payment mortgage is designed to help the first time home buyer qualify for loans by basing repayment schedules on salary expectations. 

With this type of mortgage, the interest rate and maturity are fixed but the monthly payment varies. For example, a 10%, $60,000, 30-years loan normally requires monthly payments of $527 for complete amortization. Under the graduated payment mortgage, payments could start out as low as $437 per month the first year, then gradually increase to $590 in the eleventh year and then remain at that level until the thirtieth year. 

Since the interest alone on the $60,000 loan is $500 per month, the amount owed on the loan actually increases every month. Only when the monthly payment exceeds the monthly interest does the balance owed on the loan decrease. 

The graduated payment mortgage was created by the U.S. Department of Housing and Urban Development. The FHA insures graduated payment mortgages under Section 245 and offers five repayment plans, each designed to fit a different buyer's particular needs. It is expected that this program will likely appeal most to the first-time home buyers in the $20,000 to $35,000 income range because it enables them to tailor their installment payments to their expanding incomes, and thus buy a home sooner than under regular mortgage financing. Note, however, that the down payment required will be somewhat larger than the 3% to 5% required on standard FHA 203(b) mortgages. This is because the FHA stipulates that the mortgage cannot exceed 97% of the house value, including deferred interest. To be more attractive to lenders, an adjustable graduated payment mortgage is now available and should be utilized especially by first time home buyers. It combines variable interest provisions with graduated payment features.

Graduated Payment Mortgage To Blended Rate Loan