Graduated Premium Mortgages - Posted by Sean

Posted by Sean on April 25, 1999 at 16:57:25:

…people who think their income will go up at 7.5% a year every year are silly. I’d also like to point out that a lot of people that had normal mortgages got overleveraged in the 80s as well.

On the other hand rents are known to go up 3-5 percent a year (let’s say 4 percent). So you buy one unit on a 30-year amortized and one unit on a 30-year GPM and plan to raise rents at 4 percent and your mortgage payment will stay constant on one and raise 7.5 percent on the other. That’s an average of 3.75 percent raise per property. The 4 percent rent raise will carry that without difficulty.

One hand washes the other. Similarly the GPM property pulls the 30-year amortized along the first 15 years, the amortized one pulls the GPM along the last 15.

Graduated Premium Mortgages - Posted by Sean

Posted by Sean on April 25, 1999 at 08:27:55:

Everyone who’s read a few of my posts knows I’m a big fan of graduated premium mortgages. They are a special type of 30-year mortgage that start out with very low payments (negative amortization) and the payment goes up every year (typically 7.5%). The entire loan will be paid off in 30-years. It’s great for people who need cash flow now and not in 30-years after the property’s paid off.

HOWEVER, I have discovered that having such a mortgage lowers your FICO score for about the first 8-10 years. It’s still worth checking out, but use with caution. Thanks.

Re: Graduated Premium Mortgages - Posted by Bud Branstetter

Posted by Bud Branstetter on April 25, 1999 at 16:07:32:

This type of mortgage was prevelant in the early 80’s here in Texas. Builders would even get the wife a job to be sure they qualified. Young couples thought their income would go up as it had been.

When the Fed’s pulled the plug on inflation and tightened the money supply these were the first to go. Wages did not go up, people started losing their jobs and houses began going into foreclosure. Researching at the court house I saw many that bought a new house several months before the old one got foreclosed.

The price of houses and rents were in the dumps for years. Many overleveraged investors lost most if not all.