Category: 

What is a Growing Equity Mortgage?

Article Details
  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 20 February 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
  • Print this Article

A growing equity mortgage is a fixed-rate mortgage in which home buyers increase their payments throughout the life of the mortgage. By increasing the payments, the buyer can pay down the principal of the loan quicker and get out of the mortgage faster. The growing equity mortgage is a popular technique used by people buying a home for the first time who might not have the capital to make big initial monthly payments. This type of mortgage can cause problems for buyers if they have financial troubles, because the payments will go up regardless of the buyer's situation.

Very few people who wish to buy a home have the kind of capital to allow them to buy the home in one lump payment. Instead, those people can enter into mortgages, which are arrangements with lenders to pay off the price of the home in installments over a set period of time that can span many years. In addition to repaying the principal of the loan, the borrowers must also make interest payments to the lender. Those wishing to burn through their mortgage in a quicker fashion than normal may want to look into a growing equity mortgage.

Ad

This mortgage is so named because the borrower's payments will grow over time from the initial amount as determined by an arranged schedule with the lender, meaning that the borrower's equity in the house will be growing at a faster rate than if he had a traditional mortgage. The interest rates, which are relatively low with a growing equity mortgage, remain fixed for the life of the loan. By getting out of the mortgage quicker, the borrower should be able to save a significant amount on interest payments.

There is a subtle difference between a growing equity mortgage and the similar graduated payment mortgage. In a graduated payment mortgage, borrowers also see their payments increase incrementally, but the minimum for a monthly payment is set at a lower bar than with growing equity. Since this is the case, negative amortization may occur if the monthly payment is less than the interest due for that month. Negative amortization actually makes for a greater financial burden on the borrower in the long run.

Younger homeowners who may be in the midst of their first jobs are best suited for a growing equity mortgage. As their income grows, so will their ability to increase their monthly payments. Since the schedule for payments is set beforehand, it is incumbent upon the borrowers to prepare for the future when the payments increase. Otherwise, they run the risk of defaulting on the mortgage.

Ad

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email