What Is a Growing-Equity Mortgage (GEM)?

A growing-equity mortgage (GEM) is a type of fixed rate mortgage where the monthly payments increase over time according to a set schedule, rather than remaining fixed and equal over the loan term. The interest rate on the loan does not change, and there is never any negative amortization. Instead, the first payment is a fully-amortizing payment and as the payment amount increases over time, the additional amount above and beyond what would be a fully amortizing payment is applied directly to the remaining principal balance of the mortgage, shortening the life of the mortgage and increasing overall interest savings.

Key Takeaways

  • A growing-equity mortgage (GEM) is a variation on a fixed rate mortgage where additional principal payments are pre-scheduled and increase over time, often at 5% a year.
  • The additional payments allow the mortgage to be paid off quicker and with lower total interest payments.
  • The FHA offers GEM loans to borrowers who have a high potential for earnings growth that can cover progressively increasing payments, where the FHA will insure the lender against losses.

How Growing-Equity Mortgages Work

A growing-equity mortgage effectively allows a borrower to accelerate payment of their fixed-rate mortgage by scheduling additional principal payments that increase over time. A benefit of a growing-equity mortgage, in addition to paying off the financing early the schedule helps build up equity in the home that the borrower could leverage if needed. The payments for growth-equity mortgages typically rise annually, increasing up to 5% per year.

A caveat of this type of financing is that with the size of the payments increasing annually, it is likewise necessary for homeowners’ salaries or ability to pay to grow to accommodate the larger payouts too.

A growing-equity mortgage is not to be confused with a graduated payment mortgage. A graduated payment mortgage also has a fixed interest rate and payments that increase at set intervals, but a graduated payment mortgage also has negative amortization. In other words, unlike a growing-equity mortgage, the initial payments on a graduated payment mortgage are set below what a fully amortizing payment would be (they are actually set below what an interest-only payment would be). This creates negative amortization, not interest savings.

Other Considerations for GEMs

Applying for a growing-equity mortgage can be the same as applying for other types of mortgages, with comparable credit requirements. There may be options for lower down payment associated with this type of mortgage. Some lenders who offer growing-equity mortgages in particular to first-time home buyers who would otherwise not likely be able to afford the upfront costs of purchasing a home. Furthermore, these loans can be offered to those who also might not qualify for conventional mortgages. Federal Housing Administration offers a growing-equity mortgage program specifically for this purpose.

Under the guidelines of the FHA, those with limited income, but who also have a reasonable expectation of increases to their earnings, can apply for growing equity mortgages. When such mortgages are insured through FHA, the lenders are given protection in case of default by the borrower. FHA insurance for growing-equity mortgages can cover new purchases, refinancing, and rehabilitation of properties. The financing can also be for units in condominiums or shares in cooperative housing.