Loan Modification

An FHA Loan with Negative Amortization? Yup

By Gina Pogol

It’s called a graduated payment mortgage, or GPM. It’s a mortgage that offers lower payments in the initial years of the loan, which gradually rise until they level off and remain fixed for the mortgage’s duration. And yes, in the beginning, your payments may not cover the interest due, therefore the principal balance will increase. But these are not payment option ARMs; they are considerably safer both for you and the lender.

Who can benefit from this program? Young gunners, that’s who. If you are new to the work force but are quite certain of earning significantly more in the coming years, a GPM can allow you to get into a house now (while home prices are almost tragically low). Just graduate and have college debt? A GPM can help you minimize housing costs and free up cash to repay those student loans. Then, when your income is higher and your debt load is lower, you can apply more of your resources toward repaying your home loan. You must live in the property and it can only be a single family dwelling (no duplexes, triplexes, or fourplexes).

How does a GPM work?

You can choose your GPM, and they come in five flavors. Here’s a run-down:

* Monthly payments that increase 2.5% each year for five years (before leveling off).

* Monthly payments that increase 5.0% each year for five years.

* Monthly payments that increase 7.5% each year for five years.

* Monthly payments that increase 2% each year for ten years.

* Monthly payments that increase 2% each year for ten years.

Your starting payment depends on which option you choose, but the bigger the increase you select, the smaller your initial payment will be. The actual calculations are pretty scary if you’re not a math major. For example, if you wanted a $200,000 mortgage and interest rates were at 8%, your principal and interest payment would be $1,468, but only $1,102 with a GPM featuring 5% increases per year over five years. At the beginning of year six, the payment reaches $1,502 and stays there for the duration of the loan’s term.

So you can see that this is not the world of pay-option ARMs with people making minimal 1% payments and then having their monthly obligation double a few years down the road. It’s a fairly conservative product that can provide those just starting out with extra help.

Full post as published by FHA Mortgage Guide on July 05, 2010 (boomark / email).