Florida Real Estate Sales Associate Examination Content OutlineReal Estate FinanceMedium
A borrower is seeking a mortgage that allows for smaller initial payments, which gradually increase over time. This type of loan is often chosen by individuals who expect their income to rise in the future. Which mortgage instrument is being described?
- AGraduated payment mortgage (GPM)
- BFixed-rate mortgage
- CBalloon mortgage
- DAdjustable-rate mortgage (ARM)
Show answer & explanationAnswer & explanation
Correct answer: A. Graduated payment mortgage (GPM)
A Graduated Payment Mortgage (GPM) is designed with lower initial monthly payments that gradually increase over a set period, after which they level off. This structure is ideal for borrowers who anticipate their income growing.
Why the other options are wrong
- B. Fixed-rate mortgages have constant principal and interest payments throughout the loan term.
- C. A balloon mortgage has relatively small payments for a short period, followed by one large lump sum payment at the end.
- D. Adjustable-rate mortgages have interest rates that can change, leading to fluctuating payments, but not necessarily a predetermined increase pattern.
Graduated Payment Mortgage (GPM)
A type of mortgage where the monthly payments start low and gradually increase over a specified period, typically 5-10 years, before leveling off for the remainder of the loan term.
- Designed for borrowers expecting future income increases
- Initial payments may not cover full interest, leading to negative amortization
- Payments become fixed after the graduation period
- Less common today due to potential for negative amortization
Memory trick: GPM: 'Gradual Payment Movement' up.