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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Growing Equity Mortgage
As a borrower, there are multiple options to choose from when you are planning to buy a home or refinancing your mortgage. If you take a 30 years conventional fixed rate mortgage your monthly payments (Principal and Interest) are amortized over 30 years.
As you make your payments every month, a portion of your payment goes towards the principal and the rest towards your interest.
In a traditional mortgage, you build equity on your home as you pay down your principal balance every month.
However, there is one program that may help you to build equity faster. In this post, we will understand what Growing-Equity Mortgage is and how it works in detail.
What Is GEM?
GEM, also known as growing equity loan is an alternative type of fixed rate mortgage. The amount paid each month increases over time through an agreed payment plan.
This means that more money is paid towards the principal mortgage balance; as a result, the borrower reduces the term of the loan and pays less interest on the loan. These loans also help build equity faster than traditional mortgages.
GEM finance is a program designed to help homeowners build equity in their homes faster.
With the growing equity loan program, buyers start making regular loan repayments, and after a certain period, the monthly mortgage payment increases.
With GEM finance, you can build equity in your home faster than usual and the loan can be repaid much more quickly.
Most of the equity growth mortgages are typically paid off in just 15 years instead of the regular 30 years.
How Does A GEM Work?
A GEM productively allows the borrower to speed up repayment of their fixed rate loan by scheduling additional payments towards their principal that grow over time.
Apart from paying off the loan early, a growing equity loan helps build equity more quickly that the borrower can use when needed. Growth equity loan payments usually increase annually by up to 5% every year.
There is a condition to GEM financing. As the payment increases each year, the borrower’s income (or ability to pay) must also increase to cover the higher payments.
A GEM mortgage is not to be confused with a graduated-payment mortgage loan. A graduate mortgage loan also has a fixed interest rate and repayments that increase at set intervals.
However, the graduated payment loan has negative amortization. In other words, unlike GEM, the first installments of a graduated mortgage are placed below what is a full amortization payment (it is placed below what is an interest-only payment).
Due to payments lower than regular the graduate mortgage causes negative amortization.
Pros Of Getting A GEM:
One of the big benefits is that you save a huge amount of money in interest. With GEM financing, your mortgage payments will increase over time which will allow you to pay more towards the principal repayment.
The faster you repay the principal, the less interest you will pay on the loan. As a result, you save a significant amount of money over the tenure of your loan.
Another advantage is that you can pay it off faster than the traditional way. Think about what it would be like to pay off a 30-year loan in 15 years.
If you get a GEM, you no longer have to worry about the biggest obligation once it is paid in full.
Another benefit of a GEM loan is that you can build equity in your home more quickly.
You can use your home equity to borrow funds against it in case of emergency. You can use a home equity loan, HELOC, or mortgage refinancing to cover major expenses in the future like paying off your high-interest debts, remodeling, student loans, etc.
If you are using home equity for home improvement purposes, you can deduct the interest from your taxes.
Cons Of Getting A GEM:
The obvious downside to this program is that your mortgage payments will increase over the years.
You’ll start paying off your mortgage with full amortization. Unlike graduate loans, where you start with a small monthly payment and work your way up.
With GEM you start with full payment and increase that amount and end up with high mortgage payments at the end of the loan.
Due to an increase in the monthly mortgage payment, you need to ensure that your income increases at the same or faster rate.
Throughout your career, you should get a raise or find a better-paying job. Many people struggle with this situation because they can’t raise their wages to meet their mortgage payments.
Conclusion
Growing-Equity Mortgage is one of the best options to build your equity and pay off your mortgage faster. If you plan to become mortgage debt free quicker, you can choose GEM financing.
However, if you think that increased payments are something that you might not be able to pay in the future, you might want to consider a regular conventional mortgage.
