Graduated-payment mortgages (gpms), Financial Management

The payments on GPMs unlike the payments on traditional mortgages are not equal. The payments under GPMs start at a relatively low level and rise for a specified number of years and then become equal after the specified number of years. The level of steps of increase and the specified number of years after which the payments become equal depend upon the plan indicated in the mortgage agreement.

The terms of five popular plans are given in the table below:

Table 1: Graduated-Payment Mortgages

Plan

Term to Maturity
(in years)

Years that Payments Rise

Percentage Increase per year (%)

  I

         30

      5

           2.5

 II

         30

      5

           5.0

III

         30

      5

           7.5

IV

         30

     10

          2.0

 V

         30

     10

          3.0

The comparison between monthly payments under a GPM based on Plan III and those under a traditional mortgage for a loan of $100,000 at 10% interest is given below:

Table 2

Year(s)

Monthly Payment under GPM ($)

Monthly Payments under Traditional Mortgage ($)

        1

   667.04

          877.58

        2

   717.06

          877.58

        3

   770.84

          877.58

        4

   828.66

          877.58

        5

   890.80

          877.58

    6-30

   957.62

          877.58

GPMs are preferred by young first-home buyers whose current income is not sufficient to take on a large loan, but whose income is expected to increase rapidly in the near future.

As GPMs have smaller initial payments than the traditional mortgages, they do not pay down their mortgage balances quickly. Another feature of GPMs is that the mortgage balance increases for a short period of time because smaller payments in the initial years do not even cover the interest and the shortfall is added back to the mortgage balance. However, with the increase in the monthly payments, mortgage balance gradually decreases and eventually reaches zero by the end of the term.

Figure 3: Comparison between Plan III GPM and a Traditional Mortgage              

1569_comparison of GPM and traditional mortgage.png

Figure shows the mortgage balance for a traditional and a plan III GPM. Under plan III GPM, mortgage balances increase for a particular period and then start declining.              

Posted Date: 9/8/2012 7:39:11 AM | Location : United States







Related Discussions:- Graduated-payment mortgages (gpms), Assignment Help, Ask Question on Graduated-payment mortgages (gpms), Get Answer, Expert's Help, Graduated-payment mortgages (gpms) Discussions

Write discussion on Graduated-payment mortgages (gpms)
Your posts are moderated
Related Questions
Tokyo Stock Exchange In the 1870s, a securities system was introduced in Japan and public bond negotiations began. This resulted in a demand for public trading institution, whi

Q. What do you mean by Treasury Bills? Treasury bills (TBs) are short-term government securities. The usual practice in India is to sell treasury bills at a discount and redeem

Assume that ABC is considering opening an ice cream shop in Amsterdam. The shop will cost 1.8 million Euros, and the present value of the expected cash flows from the store is 1.4

Q. Define Arbitrage Process ? The basic theory of the MM approach if we ignore the taxes is that the total value of a firm should be constant irrespective of the degree of leve

i have Passed all three level of CFA program and i want to join you expert team. will you please tell me will this happen

this case has been framed in order to test the skills

evaluate the importance of leverage in a small scale companyestion..

suppose perfect competition prevails in the market for hotel rooms. the current market equilibrium price of a stanar hotel room is 100 per night

The value of node is determined using a methodology called backward induction. The value at any node depends on the future cash flows; therefore, we need to start from

Q. Explain about Loans - Forms of Bank Finance? When a bank makes an advance in lump-sum against some security it is called a loan. In Case of a loan, a specified amount is san