Texas Real Estate Sales Agent ExamFinancingEasy
A buyer is interested in a home but is concerned about the initial monthly payments being too high, even though they expect their income to increase significantly in the next few years. Which loan type would best address their concern by offering lower initial payments that gradually increase over time?
- ABalloon mortgage
- BGraduated Payment Mortgage (GPM)
- CFixed-rate mortgage
- DAdjustable-Rate Mortgage (ARM)
Show answer & explanationAnswer & explanation
Correct answer: B. Graduated Payment Mortgage (GPM)
A Graduated Payment Mortgage (GPM) is specifically designed for borrowers who anticipate their income to rise, as it starts with lower monthly payments that gradually increase over several years. This structure helps make homeownership more accessible for those with growing earning potential.
Why the other options are wrong
- A. A balloon mortgage has a large lump sum payment at the end, which is not related to managing initial monthly payments.
- C. A fixed-rate mortgage has consistent payments, which would not address the concern about high initial payments.
- D. An ARM's payments fluctuate with market interest rates, introducing uncertainty, not guaranteed lower initial payments.
Graduated Payment Mortgage (GPM)
A mortgage loan where the initial monthly payments are lower than a traditional fixed-rate mortgage and gradually increase over a specified period, typically 5-10 years, before leveling off.
- Designed for borrowers expecting income growth.
- Payments start low and increase annually.
- Can result in negative amortization in early years.
Memory trick: Grow your payments, grow your home.