Are FHA Graduated Payment Mortgages Right For Me?

Bruno Simpson Last Updated Jul 11, 2017 (0) comment

graduated payment mortgages

Many low income home buyers who expect better earnings over the next 5 to 10 years may decide that a Graduated Payment Mortgage is the right fixed rate home loan for their family. Officially referred to by FHA as a Section 245 loan, Graduated Payment Mortgages are different from Growing Equity Mortgages that may allow negative amortization.

Intended for owner-occupants, not investors, this program gives home buyers a way to purchase a home with initially very low monthly payments. While this may seem like a good deal, it must not be forgotten that these monthly amounts may fail to outpace the rate at which interest is accrued. Therefore the actual cost of borrowing may be much higher as the amount of debt you carry may rapidly increase in those first years of repayment.

Monthly Payments Start Low, Increase Over Time

Buyers who are considering a Graduated Payment Mortgage should keep in mind that while their monthly payments to the principal and interest will be very small, they will increase substantially for up to 10 years depending on the repayment schedule that is agreed to at signing.

It is when the monthly payments increase that your principal and interest get paid down more aggressively, resulting in more equity and less debt in the home.

This and other select other types of FHA programs are geared towards younger buyers and the FHA insurances allows a private lender to provide this as a financial solution to low and moderate-income families that are especially concerned with initial purchase costs.

Speaking of those initial purchase costs, what you end up spending will be strongly affected by your credit scores. These are a big factor in any personal finance decision and they will almost always affect what your actual downpayment amount turns out to be. In addition to downpayment, this will dictate your interest rate and even whether or not your loan application is eligible for approval.

The 5 FHA Graduated Payment Mortgage Plans

To reiterate, when you move forward with a Graduated Payment Mortgage, you are signed to a fixed interest rate that will not change during the life of the loan. The thing that does change over time is that monthly payment.

The monthly payment of three of these FHA plans will increase in the first 5 years by one of these rates:

  • 2.5%
  • 5 %
  • 7.5%

At a high level, these are the 5 year plans and the monthly payments stay the same in Year 6 for the remainder of the mortgage. As for the other two of the five home loan options, a homebuyer can expect to see payments rise annually at about 2% to 3% for the first 10 years. Similar to the five year plans, it is in the 11th year that monthly payments stay the same for the remainder of the repayment schedule.

How To Get The Best Graduated Payment Mortgage

For health concerns, it is logical to speak with a doctor and that same logic applies to home buying. A hopeful home buyer should make certain to get the advice and guidance of a qualified mortgage broker and real estate professional. At FHA Loan Search, we provide tools to help you get the conversation started.

Our first suggestion is to check your credit report for accuracy and arm yourself with knowledge by reading, “Home Credit: What FICO Score is Needed To Buy a House.” After that, we encourage you to have an honest conversation with a mortgage professional who will provide you with some advice and also a free home loan quote. You can do that by clicking here and completing this 60 second form: Get Started.

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