What Are Growing-Equity Mortgages (GEMs)?
Growing-Equity Mortgages (GEMs) are a unique type of fixed-rate mortgage designed to help borrowers pay off their loans faster and build home equity more rapidly. Unlike traditional fixed-rate mortgages with static monthly payments, GEMs feature scheduled payment increases over time. These incremental payments go towards reducing the outstanding principal amount, ultimately shortening the loan term and saving borrowers on total interest costs. In a nutshell, GEMs offer a proactive approach to mortgage repayment that can benefit financially savvy homeowners.
### **Key Takeaways**
– GEMs involve pre-scheduled additional principal payments that grow yearly, typically at a rate of 5%.
– These extra payments expedite the mortgage payoff and lead to reduced overall interest expenses.
– The FHA extends GEM loans to borrowers with potential income growth to support increasing payments, backed by the FHA’s loss protection for lenders.
How Do Growing-Equity Mortgages Work?
By strategically scheduling rising principal payments, growing-equity mortgages empower borrowers to pay down their fixed-rate mortgages ahead of schedule. Alongside early loan repayment, GEMs allow homeowners to amass home equity quicker, providing a valuable asset for potential leveraging. Typically, these mortgages see annual payment increments of up to 5% to expedite equity growth.
However, a crucial consideration with GEMs is that as payment amounts increase annually, borrowers’ incomes must also rise to accommodate larger payments.
Not to be confused with graduated payment mortgages, GEMs differ by not having negative amortization. While both feature fixed interest rates and scheduled payment increases, graduated payment mortgages incur negative amortization due to initial payments being below fully amortizing levels. In contrast, GEMs yield interest savings by directly reducing principal amounts with increasing payments.
Other Considerations for GEMs
The application process for growing-equity mortgages mirrors that of other mortgage types, with similar credit prerequisites. Some GEM programs may offer options for lower down payments, catering to first-time homebuyers facing upfront cost challenges.
Furthermore, GEMs serve borrowers who may not qualify for conventional mortgages, with the FHA providing a dedicated program for this purpose. Targeting individuals with limited incomes but anticipated earning growth, FHA-backed GEMs offer lenders protection against borrower default. These FHA-insured mortgages cover various property types, including new purchases, refinances, and property improvements.