APRs, ARMs and GPMs
In comparing any type of loan, APRs will allow you
to adequately understand the differences between loans.
Basically, APRs allow you to calculate the cost of a
loan over a year while including the various points
and other costs that are included in a loan.
One of the most confusing facets of APRs is that the
APR on a 15-year loan will carry a higher rate due to
the fact that the points take place over a 15-year term
rather than a 30-year term. APRs are also considered
a means to protect buyers from companies who do not
disclose all the fees associated with a particularly
low introductory adjustable rate loan.
Adjustable rate mortgages (ARM) usually begins with
an interest rate that is two to three percent less than
a fixed rate mortgage, and might allow you to purchase
a more expensive home. However, these interest rates
change at set times depending upon the market conditions.
Although it is worth noting that if interest rates drop,
so do your mortgage payments.
Some mortgages combine aspects of fixed and adjustable
rate mortgage, perhaps starting at a low, fixed rate
for seven years, then adjusting to market conditions.
Graduated Payment Mortgage (GPM) is another alternative
to the traditional adjustable rate mortgage and is becoming
more popular as mortgage companies seek other ways to
assist buyers in financing their homes.
Unlike an ARM, GPMs have fixed rates and payment schedules.
With a GPM, the payments are usually fixed for one year
at a time. For the first five years, payments escalate
by 7.5 percent, after that period, payments increase
five additional percent over the previous years’
These loans are available for 30-year and 15-year increments,
and for both conforming and jumbo loans. With the gradual
payments and a fixed rate, GPMs have a scheduled negative
amortization of around ten to 12 percent of the loan
The higher the note rate the larger the amortization.
This compares to the possible negative amortization
of a monthly adjusting ARM of 10 percent of the loan
amount. The GPM has a set payment schedule so additional
principal payments reduce the term of the loan. Any
additional payments on an ARM can help the lender avoid
negative amortization, and the payments decrease, while
the term of the loan remains constant.