"Graduated-Payment" Mortgages

      A graduated payment mortgage is a type of mortgage where the payments start off low, increase at preset times, and then stabilize.  The difference between a graduated payment mortgage and an adjustable rate mortgage is that a borrower who takes out a graduated payment mortgage will know what the payments will be through the duration of the mortgage loan, even though the payments change.  The initial lower payments are not sufficient to amortize the loan, and the interest is not sufficient enough to cover the interest due on the loan.  The result is that the interest that is not paid during the loan is added to the principal amount of the loan.  This is also known as negative amortization.

As opposed to ARMs, Graduated Payment Mortgages have a fixed note rate / payment schedule. With a GPM the payments are generally fixed for one year at a time. Each year the payments graduate at 7.5% - 12.5% of the previous years payment. A GPM has a fixed payment schedule so the additional principal payments reduce the term of the loan.

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