Types of Home Mortgages: Growing Equity Home Mortgage

Understanding a Growing Equity Home Mortgage Loan

A growing equity home mortgage (GEM) is a fixed rate loan in which the payments start low and increase by a set amount over a period of time. This period is often the life of the loan itself, and the increase can come every month or year. The increase goes toward the principal.

Who is Best Served by a GEM

This loan makes it possible for families to own a home who would not normally qualify for a loan because of current income-to-payment ratios and low down payments. The GEM also makes it possible for these families to pay off the loan faster than with traditional mortgages due to the increase in payment going to the principal. Also, as the principal is paid down, the interest is reduced as well because the actual loan is smaller.

The Increase Use of the GEM

This loan, which is growing in popularity, is backed by the FHA insurance and VA guarantee programs. It seems on the surface similar to the graduated payment mortgage (GPM), but with the GEM, all of the increase goes toward principal, a much more favorable situation for borrowers long term.

Problems with a GEM

One problem with these mortgages is that sometimes a homeowner’s financial resources don’t increase when the payment does. This can create problems for the borrower which only get worse with time. The ideal candidate for this loan is someone who is sure of increased wages or addition income from other sources.

Benefits of a GEM

However, for families who would not otherwise be able to afford a home—or upgrade later—the GEM provides a way to do both. This loan, because equity is built faster, is paid off more quickly and also grants the homeowner more equity when selling the house, thus building wealth for the family for future home purchases they normally would not have had. Although this mortgage is based on a 30-year fixed rate, the loan is actually paid off in 22 years or less, depending on the borrower’s particular schedule.

Summary: Is a GEM Right for You and Your Family Today?

Although this mortgage is not for everyone, those who wish to buy a home but need lower monthly payments and low downpayments are prime candidates. You will know ahead of time how much your payment is going to increase and when, so you won’t be subject to the economic indexes like you would with the ARM. Just make sure that you will be able to handle payments as they rise periodically.