A Graduated Payment Mortgage (GPM) is a type of mortgage loan where the borrower initially makes lower monthly payments that gradually increase over a predetermined period. The idea behind a GPM is to provide borrowers with lower initial payments, making homeownership more affordable in the early years of the loan when income may be lower. As the borrower’s income is expected to rise over time, the payments increase to accommodate this expected increase in financial capacity.

Here are key features of a Graduated Payment Mortgage:

1. **Payment Structure:** The monthly payments on a GPM start lower than what would be required for a fixed-rate mortgage. The payments then increase at specified intervals, typically annually.

2. **Negative Amortization:** In the early years of a GPM, the monthly payments may not be sufficient to cover the interest due on the loan. The unpaid interest is added to the outstanding balance, resulting in negative amortization. This means that the loan balance can increase initially, even though the borrower is making payments.

3. **Payment Increase Schedule:** The payment increase schedule is predetermined and outlined in the loan agreement. For example, a 5-1 GPM would have payments increase every year for the first five years and then remain fixed for the remaining loan term.

4. **Interest Rate:** GPMs can have a fixed or adjustable interest rate. If the interest rate is adjustable, it may be tied to a specific financial index.

5. **Lifetime Cap:** Some GPMs have a cap on how much the monthly payments can increase over the life of the loan. This provides a degree of protection for borrowers against large and unexpected payment increases.

6. **Borrower Qualification:** Lenders typically qualify borrowers for GPMs based on their ability to make payments at the highest level that will be required over the life of the loan.

GPMs can be suitable for individuals who expect their income to rise in the future but need more affordable payments in the early years of homeownership. However, potential borrowers should be aware of the negative amortization feature and carefully consider their ability to handle increasing payments in the later years of the loan.

It’s important to note that GPMs are less common than fixed-rate or traditional adjustable-rate mortgages, and their availability may vary among lenders. Borrowers should thoroughly understand the terms and potential risks associated with a GPM before entering into such a mortgage agreement.