A mortgage is a secure form of debt instrument in which the underlying is usually the real estate property.The borrower is required to payback the amount in fixed predetermined installments.Attaining a mortgage depends upon the choice of the borrower and his price range and depending on this there are two options;Graduated payment mortgage (GPM) and mortgage amortization.
Graduated payment mortgage is a process in which lower initial payments are charged in the earlier years of the loan and the amount gradually increases to such level as enough to get mortgage amortization within a 30 year loan term.While Mortgage amortization is a system in which the principal amount on a loan decreases as periodic repayments are made.
Each periodic repayment contains full amount of interest chargeable and a portion of the principal amount.With gradual repayment of the original amount,the principal is reduced and exultantly less interest is chargeable.Each installment is determined using the effective interest rate method.The mortgage accounting and calculations are quite complicated.
Through GPM, a low income buyer can have a large house provided if he can show a rise in income in coming years.So this system may be optimal for home buyers who do not earn handsomely. Although GPM seems more convenient,it usually results in accrued interest piled up at year end making the total greater than the original loan.Nevertheless,this can be prevented through high down payments but then getting a GPM will be difficult for those who do not have much of financial savings.
Unlike mortgage amortization which offers assurance to home buyers that the loan payment will decrease during the life of the loan,GPM involves negative mortgage amortization, which means that the amount charged will increase .
If the underlying asset is to be sold immediately,GPM may be preferred over mortgage amortization but the final decision should only be made after consulting someone with relevant expertise and after considering the price range.
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