Growing Equity Mortgage Requirements
A Growing Equity Mortgage (GEM) is a fixed rate mortgage that is structured so that your monthly payments start low and increase over a period time. This program is really designed for families that expect to earn greater income in the future but may have limited income when the loan is applied for and originated. While there are many loan options out there, the goal of this program is to help home buyers gain equity in their homes faster than not.
Earn Equity Faster With a Growing Equity Mortgage
With a GEM, the interest rate on is not deferred and it does not change over the life of your mortgage. To help you earn equity faster, as the minimum payments increase according to the loan payment schedule, the additional amount being paid each month is applied directly to the principal balance. This effectively allows you to shorten the life of the mortgage, paying less interest over time and saving a lot of money compared to other loan options. In some cases, people actually end up paying off their loans in about half the time compared to more traditional 25 and 30 year mortgages.
Generally, the Department of Housing and Urban Development offers FHA mortgage insurance to cater to the needs of promising first time home buyers. As many of these people have young families, it is often the case that large upfront costs and down payment requirements are too prohibitive.
Recognizing that some homeowners may have some significant future earnings potential, FHA insurance makes the Growing Equity Mortgage program possible, allowing them to aggressively satisfy their repayment obligations.
How Does the GEM Program Work?
FHA mortgage insurance reduces a lender’s risk and allows them to offer home loans with lower downpayment requirements and at lower interest rates. This means that buyers who would otherwise not qualify for conventional loans may be really happy to find that they can enjoy some of the same benefits as a more qualified buyer that has a 20% down payment ready to go. These benefits may include low interest rates.
What FHA Assistance Is Right For My Growing Equity Mortgage?
Depending on the type of property you are after, each particular FHA section may have different requirements that you must satisfy in order to be approved for your loan. There are five different plans and sections you should know about are as follows:
- Section 203(b): FHA mortgage insurance for single to four-family homes
- Section 203(k): This program qualifies buyers looking to refinance, rehabilitate, or purchase a home
- Section 203(n): For homebuyers in need of cooperative housing, this FHA section is appropriate
- Section 234(c): Growing Equity Mortgages for condominiums
In each case, with a Growing Equity Mortgage the first round of annual payments to the loan principal and interest will be set according to a 30 year pay schedule. It is typical to see these increases amount to an additional 1% to 5% each year but this may vary depending on your final mortgage requirements. Despite that 30 year pay schedule, a Growing Equity Mortgage should not not span longer than 22 years.
How is a Growing Equity Mortgage Different From a Graduated Payment Mortgage?
This question is where many people get confused. The answer all comes down to the term, “amortization” and how it is different from “negative amortization.” Like a GEM, a graduated payment mortgage has a fixed interest rate and monthly payments will increase over a specific period of time. In the case of a Graduated Payment Mortgage, however, there is an allowance for a negative amortization. This means that the first round of mortgage payments are set so low that they may not actually cover the cost of monthly interest that is being accrued. This will create what is called negative amortization and by paying the minimum due each month, there is no interest savings. Instead, this may dramatically increase the amount of debt you carry on the loan.