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Purchase program lowers interest rates

Graduated Payment Loan Lowers Interest Rate 2% In First Year

Ease Into Ownership

A new home loan program lowers your interest rate by 2% in your first year, and 1% in your second year of homeownership.

At the time of the writing of this article, that would mean that you could buy a home using a 30 year fixed mortgage at an interest rate of under 3% for the first 12 months.

After the first year, your interest rate goes up 1%, which is still below market rates if you were take out a traditional 30 year mortgage today.

Beginning in the third year, your interest increases one more time to your final interest which is determined at the time that you bought your home.

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This loan program is perfect for homebuyers that expect to make more money in the future, and want to buy a home today.

Lower Interest Rate Paying No Points

Most people are familiar with paying discount points to buy down your interest rate for the life of the loan. The problem is that most people do not keep their first loan for longer than 5 to 7 years.

Paying discount points will reduce your interest rate and your payments over the entire term of your loan. This is a great option if you plan to keep that loan for more than 10 years.

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After a few years, most homeowners are looking to remove mortgage insurance, lower their interest rate or total monthly payments, or do improvements to the home.

Paying discount points to lower your payment will increase your closing costs, resulting in a slightly lower payment over the entire term of your loan.

Without increasing your closing costs, let’s look at how this program helps you ease into homeownership.

Without Graduated Payment

Here is a real example based on interest rates from March 17th, 2017

Purchase Price:         $445,000
5% Down Payment:    $22,250
Loan Amount:           $422,750
Interest Rate:                 4.25% – not paying discount points
Loan Payment:         $2,079.68 – principal and interest only

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Total payments after 3 years:  $74,868.48

With a graduated payment loan, you get the full benefit of buying down the interest rate in the first 2 years of owning the home without increasing your upfront closing costs.

What you are doing with this loan program is you are buying down the interest rate temporarily by taking a higher interest rate later, and taking advantage of a below market rate for the first 2 years of the loan.

With Graduated Payment

Here is a real example based on interest rates from March 17th, 2017

Purchase Price:         $445,000
5% Down Payment:    $22,250
Loan Amount:           $422,750
Interest Rate:                2.75% first year
Payment 1st Year:     $1,725.84 – principal and interest only

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Interest Rate:                3.75% second year
Payment 2nd Year:  $1,957.82 – principal and interest only

Interest Rate:                4.75% third year
Payment 3rd Year    $2,205.26 – principal and interest only

Total payments after 3 years:  $70,667.09

As you can see, you are saving close to $5,000 in mortgage payments in the first three years after buying your new home.

At some point, the slightly higher interest rate will catch up with you, and your total payment will exceed what you would have paid if you did not use a graduated payment loan.

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Qualifying Basics

There are some restrictions to a graduated payment loan, most of which are simply the standard underwriting guidelines for a conventional loan.

Here’s what you need to know:

  • No income limits
  • You not have to be a first time homebuyer
  • You can only use a graduated payment loan when buying a home – refinances are not permitted
  • You can buy 1 to 4 unit properties
  • Minimum down payment is 5% of the purchase price
  • Must be primary residence or second home
  • Must be 30 year fixed rate mortgage – no ARM loans allowed
  • Maximum loan amount is conforming loan limit – $424,100

Who Should Consider Graduated Payments?

While there are no restrictions on who can use a graduated payment loan, there are some situations where it just makes so much sense that you would never consider any other way when buying your home.  Here are a few examples:

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  • You know your income will increase in the next 3 to 5 years
  • You will advance in your career in the next 3 to 5 years
  • You or your spouse will start a new career in the next 3 to 5 years
  • You may either rent or sell this home in the next 3 to5 years

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About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Carmen says:

    Great article and the examples are easy to understand

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