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’ payment.

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 amount.

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.