Graduated Payment Mortgage (GPM)

A graduated payment mortgage (GPM) is a fixed-rate home loan with payments that start lower and increase at set intervals over time. The schedule is designed to match borrowers who expect rising incomes, allowing easier initial qualification and lower early monthly payments. Payments typically grow by a fixed percentage annually until they reach the final, level payment.

Key takeaways

• GPMs reduce initial monthly payments and increase them gradually over a scheduled period.
• They can help borrowers qualify for a mortgage when current income is lower than future expected income.
• Total interest and overall cost are often higher than a standard mortgage, and some GPMs can cause negative amortization (deferred interest).
• GPMs are commonly offered through certain government-backed programs such as FHA loans.

How GPMs work

• Initial payments are set below the level payment and then increase by a predetermined percentage (for example, 2%–12% annually) for a specified number of years.
• If an initial payment is less than the interest that accrues, the unpaid interest is added to the loan principal (negative amortization), increasing the outstanding balance.
• After the graduation period ends, payments level out for the remainder of the term so the loan fully amortizes by maturity.

Benefits

• Easier qualification for borrowers whose incomes are expected to rise.
• Lower early payments improve short-term cash flow and budget flexibility.
• May allow buyers to afford a larger home sooner than with a traditional mortgage.

Drawbacks and risks

• Higher total cost: rising payments and possible negative amortization increase interest paid over the life of the loan.
• Increased principal: deferred interest, if applicable, adds to the loan balance and increases future interest charges.
• Income risk: if future earnings do not rise as expected, borrowers may struggle to meet higher payments and risk default and foreclosure.
• Prepayment: some GPMs may include prepayment penalties if you pay off the loan early.

Example

As a baseline, a $300,000 mortgage at 7% for 30 years with no graduations has a principal-and-interest payment of about $1,926 per month. With a GPM that increases payments annually (for example, a 2% annual graduation for five years), the early payments would be lower than $1,926 and then step up each year until they level off. Use a graduated payment mortgage calculator or lender amortization schedule to see exact payment amounts for a given graduation rate and schedule.

GPM vs. Adjustable-rate mortgage (ARM)

• GPM: fixed interest rate with scheduled increases in payment amounts only; payments rise according to the loan’s graduation schedule.
• ARM: interest rate (and therefore payments) adjusts periodically based on market rates and can go up or down.
  Some ARMs offer interest-only periods, which lower initial payments but do not reduce principal.

Who should consider a GPM

• Borrowers who reasonably expect steady income growth (for example, early-career professionals with predictable raises).
• Those who need lower initial payments to enter the housing market but are confident they can handle higher payments later.
  Avoid GPMs if your future income is uncertain or if you prefer a loan structure that reduces principal from the start.

How graduated payments are calculated

Payments are based on:
* Loan amount
Interest rate (fixed for the loan)
Annual graduation rate (percentage increase in payment each period)
* Number of graduation periods (years)

Lenders or online calculators can produce an amortization schedule showing payment amounts, any negative amortization, and the remaining balance over time.

Bottom line

Graduated payment mortgages can make homeownership attainable for borrowers expecting higher future income, but they often cost more overall and may carry the risk of negative amortization. Carefully review the graduation schedule, total interest costs, and worst-case scenarios for your income before choosing a GPM. Use calculators, ask lenders for detailed amortization schedules, and consider alternatives if you prefer more predictable long-term payment and principal reduction.