A Review and Preliminary Survey of Graduated Payment Mortgagors

Abstract

This paper Is a review of the literature on consumer aspects of the Graduated Payment Mortgage (GPM). It presents the findings of a pilot study designed to assess borrowers’ knowledge of and experiences with the GPM. In the sample of 43 Federal Housing Administration (FHA) Section 245 GPM holders, over one-third were first-time buyers and over one-third were single persons or household heads. The buyers purchased primarily new or nearly-new single-family detached homes at average or lower prices for the locality. The median housing-income ratio was within the range of 30–34 percent.

The majority of the loans were five-year graduation plans, with typical annual mortgage payment increases of 5 or 7.5 percent. Mortgagors perceived the final GPM principal to be higher than that for a standard fixed-payment mortgage (SFPM); the GPM interest rate and minimum down payment to be about the same or lower; GPM dosing costs to be about the same; and GPM equity buildup to be slower. Major perceived GPM advantages were the ability to tailor payments to rising incomes, the ability to qualify for a home and the suitability of GPM down payments compared to SFPM down payments. The income-increase expectations of 61 percent were met. The majority of incomes rose 7 percent or more in the first and second years after loan origination. Speed of equity buildup was important to most owners and most foresaw no difficulties in selling the home during the first five years. For 81 percent, the GPM benefits equalled or outweighed its drawbacks. While nearly one-half would still pick a GPM, 42 percent would take a SFPM, if possible.

Additional information

Notes on contributors

Betty Jo White

The author is associate professor, Department of Consumer Sciences and Housing, Colorado State University.