Graduated Payment Mortgages

An adjustable-rate mortgage is a home loan with an interest rate that may change over time. Most ARMs begin with an introductory fixed-rate period. During this time, your interest rate does not change. After that period ends, the rate may adjust at scheduled intervals based on the loan’s index, margin, and rate caps.

The CFPB explains that most ARMs have two periods: an introductory period when the rate is fixed, and a later period when the rate can move up or down based on market changes. Monthly principal and interest payments can increase, sometimes significantly, after the fixed period ends.

Understanding Negative Amortization

Some graduated payment mortgages may involve negative amortization. Negative amortization happens when the monthly payment is not enough to cover all the interest due. When that happens, the unpaid interest may be added to the loan balance.

The CFPB explains that negative amortization means the amount owed can increase even when payments are made, because the payment is not enough to cover the interest.

Things to Consider

Graduated payment mortgages are less common than standard fixed-rate or adjustable-rate loans, and availability may vary by lender and program. Before considering this type of loan, borrowers should understand:

The scheduled payment increases
The highest expected payment
Whether the loan balance could increase
How long the lower-payment period lasts
The total cost over time
Whether future income is realistic and reliable

Who May Consider This Option?

A graduated payment mortgage may be considered by borrowers who expect income growth and want to understand lower initial payment structures. However, it should be reviewed carefully because future payment increases can affect long-term affordability.