Growing-equity Mortgage
Definition and meaning of Growing-equity Mortgage in real estate.
A growing-equity mortgage (GEM) is a type of home loan with a fixed interest rate where the monthly payments increase over time according to a set schedule. The additional money from the higher payments is applied directly to the loan principal, allowing the borrower to pay off the mortgage early.
In more detail
These mortgages are designed for buyers who expect their income to rise steadily over the life of the loan. The payment increases are scheduled in advance, meaning there is no surprise payment shock for the borrower. Because the extra funds reduce the principal balance faster than a standard loan, the total interest paid over the life of the mortgage is significantly lower.
Borrowers should ensure they can comfortably afford the rising payments, as failing to meet the scheduled increases can lead to default.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Primary benefit | Accelerates home equity growth and reduces total interest paid |
| Interest rate structure | Fixed interest rate, but payments change according to a set schedule |
| Watch out for | Future payment increases that may become unaffordable if income flatlines |
A young professional chooses a growing-equity mortgage, starting with monthly payments of one thousand two hundred dollars that increase by three percent each year, reducing their thirty-year loan term to seventeen years.
Frequently asked questions
How does a growing-equity mortgage compare to a standard fixed-rate loan?
Unlike a standard fixed-rate loan with constant payments, a growing-equity mortgage features payments that rise annually. The extra payment amounts shorten the overall repayment term of the loan.
Can I achieve the same result with a standard mortgage?
Yes, you can achieve a similar result by making extra principal-only payments on a standard fixed-rate mortgage whenever you choose, without being locked into a mandatory payment schedule.