Graduated-payment mortgages (gpms), Financial Management

Assignment Help:

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.              


Related Discussions:- Graduated-payment mortgages (gpms)

Explain how to compute the overall balance, Explain how to compute the over...

Explain how to compute the overall balance and discuss its significance. The overall BOP is defined by computing the cumulative balance of payments involving the current account,

Financial management, BigGardens Ltd (BigGardens) is a private company that...

BigGardens Ltd (BigGardens) is a private company that owns and operates a chain of garden centres in the Bristol area.  The company has expanded rapidly over recent years, opening

Credit spreads and the valuation of non-treasury securities, It is not easy...

It is not easy to determine the theoretical value of non-treasury securities. However, we can use the treasury spot rate for the valuation of non-treasury security.

Approaches to valuing asset-backed securities, There are two approach...

There are two approaches to value Asset-Backed Securities. They are: Zero-Volatility Spread (Z-spread) Approach. Option-Adjusted Spread

What are the limitations of trade payable day''s ratio, What are the Limita...

What are the Limitations oftrade payable day's ratio? Year-end trade payables may not be representative of the year. Credit purchases are VAT exclusive in the income sta

What is nvp and cost of equity , 1. A standard arrangement for the orderly ...

1. A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):      A)  custodial account.     B)  sinking

Foreign exchange exposure, Using an appropriate 'factor model', assess (a) ...

Using an appropriate 'factor model', assess (a) the performance of the management in creating value for shareholders and (b) the extent of the foreign exchange exposure of a FTSE10

Floating-rate securities that have constant quoted margin, Let us look into...

Let us look into few floaters that have constant quoted margin. 1. De-leveraged Floaters 2.  Inverse Floaters 3.  Dual-Indexed Flo

Finance, a) Describe five factors that should be taken into account by a bu...

a) Describe five factors that should be taken into account by a businessman in making the choice between financing by short-term and long-term sources.

Yield to call, Yield to call is the yield that would be realized on a...

Yield to call is the yield that would be realized on a callable bond assuming the issuer of the bond redeems it before maturity. A bond's call provision is detail

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd