Graduated Payment Mortgage: Overview, Pros and Cons, Examples

What Is a Graduated Payment Mortgage (GPM)?

A graduated payment mortgage (GPM) is a type of fixed-rate mortgage for which the payments increase gradually from an initial low base level to a higher final level. Typically, the payments will grow between 7% to 12% annually from their initial base payment amount until the full monthly payment amount is reached.

Key Takeaways

  • A graduated payment mortgage (GPM) is a type of fixed-rate mortgage with an amortization schedule that provides lower payments early on that then increase over time.
  • The purpose of a GPM is to allow homeowners to start off with lower monthly mortgage payments to help certain people qualify for their loans.
  • Total costs over the life of a GPM loan tend to be greater than those of a standard mortgage, and homeowners who were able to afford earlier payments may find themselves in financial trouble as monthly bills rise over time.

How Graduated Payment Mortgages Work

A graduated payment mortgage is designed to start with the homeowner owing minimum payments. Then, over time, the payment amount increases. A low initial interest rate is what qualifies the buyer. This lower rate allows many who might not otherwise qualify for a home mortgage to be eligible because they can afford the low initial payments. Had the note been written at a higher interest rate, these buyers may not have qualified due to the higher monthly payments. This type of mortgage payment system may be optimal for young or first-time homeowners because their income levels tend to rise gradually.

A graduated payment mortgage may or may not be a negative amortization loan. If the initial payment amount is less than the accruing interest on the mortgage loan, the graduated payment mortgage is a negative amortization loan. With a negative amortization loan, the payments the borrower makes are less than the interest charged on the note. This payment structure creates deferred interest, which adds to the total principal of the loan.

Graduated payment mortgages are only available on loans from the Federal Housing Administration (FHA). FHA loans allow low- to moderate-income borrowers who are unable to make a large down payment finance up to 96.5% of the home's value.

Benefits of a Graduated Payment Mortgage

Graduated payment mortgages can offer homebuyers some key benefits. Some of the advantages associated with graduated payment mortgage loans include:

  • Potentially easier qualification for a mortgage, based on income
  • Lower payments initially, with payments that grow as your income does
  • Flexibility with budgeting monthly expenses

Choosing a graduated payment mortgage could make it easier to buy a home now versus having to wait until later when you're earning a higher income. You may also be able to get more home for your money by accepting a payment structure that evolves alongside your income. The key is the relative certainty that you'll be able to afford your mortgage payments over time as they increase.

Drawbacks of a Graduated Payment Mortgage

The primary disadvantage of a graduated payment mortgage is that the total costs associated with the mortgage are higher than those of a traditional mortgage. As payments grow to higher interest rates, the borrower may find they are only paying the interest charges and not reducing the principal borrowed. 

Also, if the graduated payment mortgage is a negative amortization loan, the borrower will pay even more interest on the loan. As deferred interest adds to the principal borrowed, this value grows, then interest calculations are based on the more substantial amount.

Another major drawback that must bear consideration is that with a graduated payment mortgage, there is no guarantee that the borrower’s income will increase in step with the increased mortgage payments. If the borrower’s income does not rise in proportion with the monthly debt, they may default on the loan. The default will further damage their credit, and the lender will foreclose on the property.


Paying off a graduated payment mortgage ahead of schedule could result in a prepayment penalty.

Graduated Payment Example

It can help to see an example of what a graduated payment mortgage looks like. So, assume you're taking out a $300,000 loan with a 30-year repayment term at 3%. The annual graduation rate is 2% with a total of five annual graduations. Here's what your payment might look like:

Graduated Payment Mortgage Schedule
 Year Payment Amount
 1  $1161.50
 2  $1184.73
 3  $1208.43
 4  $1232.60
 5  $1257.25
 6-30  $1282.39

So what would your mortgage cost if you borrowed $300,000 at 3% over a 30-year term with no graduations? Your monthly payment for principal and interest would come to $1,265.


Using a graduated payment mortgage calculator can help with estimating monthly payments versus what you might pay for a traditional mortgage loan.

Graduated Payment Mortgage vs. Adjustable-Rate Mortgage

Though a graduated payment mortgage may seem like a type of adjustable-rate mortgage (ARM), it is not the same thing. 

An adjustable-rate mortgage fluctuates periodically to reflect the market interest rate. The ARM rate is adjusted periodically, but not on a fixed schedule. Also, the interest rate may decrease or climb due to its basis on the going market rate. Conversely, the interest rate on a graduated payment mortgage only goes up.


Some ARMs allow for interest-only payments. Though this may result in a lower monthly payment, it won't help you to reduce the principal owed on the loan.


What Is a Graduated Payment Mortgage?

A graduated payment mortgage is a type of home loan in which monthly payments start out at one amount then increase gradually over time. This type of mortgage is designed to help homebuyers who may have difficulty qualifying for a loan because they earn a lower income.

Who Should Consider a Graduated Payment Mortgage?

A graduated payment mortgage may be right for someone who expects their income to increase steadily in future years. If you don't have a realistic expectation that your income will rise over time, a graduated payment mortgage could be problematic as your monthly payments increase.

How Are Graduated Payments Calculated?

Graduated payments are calculated using the mortgage loan amount, the interest rate, the annual graduation rate, and the number of graduations applied. You can calculate monthly payments for a graduated mortgage using an online loan calculator.

Article Sources
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  1. Consumer Financial Protection Bureau. “What Is Negative Amortization?

  2. “Mortgages.”

  3. Consumer Financial Protection Bureau. “FHA Loans.”

  4. The Federal Reserve Board. “Consumer Handbook on Adjustable-Rate Mortgages,” Pages 24-25.

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