Graduated Payment Program

A Graduated Payment Mortgage is a type of loan in which the payment increases annually over a specific period of time, (usually five or ten years). After this "graduation", the interest rate becomes fixed for the remaining term of the loan. If interest rates are high, borrowers can use a graduated payment mortgage as a way to be able to qualify for a mortgage loan, since the initial payment is less. However, although the payment is less, the total of the interest owed does not go down, and the interest that goes unpaid in the early part of the loan term is added back in to the loan which may lead to a negative amortization.