Growing Equity Mortgage (GEM)

Definition

A Growing Equity Mortgage (GEM) is a type of fixed-rate mortgage designed to facilitate faster equity build-up in a property. With a GEM, while the interest rate remains stable, the monthly payments increase at predetermined intervals. This increasing payment schedule allows the loan to be paid off more quickly than a standard fixed-rate mortgage, reducing the overall interest paid over the life of the loan. GEMs are often attractive to individuals expecting a rise in income over time, such as professionals early in their careers.

Examples

Young Professional Couple: Kevin and Lisa, a newly married couple, expect their incomes to rise significantly as they advance in their respective careers. They opt for a Growing Equity Mortgage to take advantage of lower initial payments. As their income increases, they can comfortably afford higher payments, which allows them to build equity more rapidly compared to a traditional mortgage.
Self-Employed Business Owner: Rachel, a self-employed business owner, anticipates her business income will grow over the next five years. She chooses a GEM so she can benefit from lower payments during the initial years of her mortgage, with the understanding that over time, increased payments will accelerate her mortgage repayment.

Frequently Asked Questions (FAQs)

What are the advantages of a Growing Equity Mortgage?

A Growing Equity Mortgage allows homeowners to build equity more quickly, reduce the amount of interest paid over the life of the loan, and pay off the mortgage faster compared to standard mortgages.

Are there any risks associated with a GEM?

Yes, the primary risk is the potential for borrowers to face financial challenges if their income does not increase as anticipated, making it difficult to keep up with the higher payments.

How do the increasing payments work?

The payments increase by a fixed percentage at regular intervals (e.g., annually). This increase in payments is predetermined at the start of the loan and follows a specific schedule.

Who is the ideal candidate for a GEM?

Ideal candidates are individuals or families who expect a significant increase in their income over time, such as young professionals or those in growing careers.

Can the payment schedule of a GEM be modified?

No, the payment schedule for a GEM is usually fixed and set at the beginning of the mortgage term. It cannot be modified.

Fixed-Rate Mortgage: A mortgage with an interest rate that remains the same throughout the term of the loan.
Adjustable-Rate Mortgage (ARM): A mortgage where the interest rate changes periodically based on a specified index.
Amortization: The process of gradually paying off a debt over time through regular payments.
Equity: The difference between the market value of a property and the amount owed on the mortgage.

Online Resources

References

“The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls” by Jack Guttentag.
“Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey Fisher.

Suggested Books for Further Study

“Mortgage Management For Dummies” by Eric Tyson and Ray Brown.
“The Real Estate Investor’s Handbook: The Complete Guide for the Individual Investor” by Steven D. Fisher.
“The Book on Rental Property Investing” by Brandon Turner.
“Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer.

Real Estate Basics: Growing Equity Mortgage (GEM) Fundamentals Quiz

### What distinguishes a Growing Equity Mortgage (GEM) from a standard fixed-rate mortgage? - [ ] It has fluctuating interest rates. - [x] The monthly payments increase according to a set schedule. - [ ] It requires a balloon payment at the end. - [ ] It offers an interest-only payment option. > **Explanation:** A GEM involves increasing monthly payments according to a predetermined schedule, facilitating faster loan repayment. ### Why might a young professional prefer a Growing Equity Mortgage? - [ ] To kind avoid paying property taxes. - [ ] To have fluctuating monthly payments. - [ ] To pay a larger down payment. - [x] To build equity faster as their income increases. > **Explanation:** Young professionals expecting a rise in future incomes may choose a GEM to leverage initial lower payments that increase, thus building equity more quickly. ### What is a key risk associated with GEMs? - [ ] Fixed payment amounts. - [ ] Time-bound property selling. - [x] Economic instability affecting ability to meet increasing payments. - [ ] Higher initial interest rates. > **Explanation:** If a borrower’s income does not rise as expected, they may face difficulties keeping up with the increasing payments. ### Compared to traditional fixed-rate mortgages, GEMs allow borrowers to: - [ ] Delay paying principal amounts. - [ ] Avoid paying interest entirely. - [x] Pay off the mortgage faster. - [ ] Have the same regular payment amounts throughout. > **Explanation:** By increasing the payment amounts, GEMs enable quicker loan repayment and equity building, contrasting with static payments in traditional fixed-rate mortgages. ### At what interval do payments typically increase in a GEM? - [x] Annually. - [ ] Every two years. - [ ] Monthly. - [ ] Quarterly. > **Explanation:** Payments in a GEM usually increase annually by a predetermined percentage set at the term’s beginning. ### What financial condition is crucial when considering a GEM? - [ ] Anticipated drop in future expenses. - [x] Expected increase in future income. - [ ] Variable housing costs. - [ ] Declining property value. > **Explanation:** Borrowers anticipating future income growth are better suited for GEMs due to increasing payment structures aligned with income increment prospects. ### Who mainly oversees mortgage regulations including those for GEMs in the U.S.? - [ ] The Securities and Exchange Commission (SEC). - [ ] The Federal Reserve. - [x] Consumer Financial Protection Bureau (CFPB). - [ ] Social Security Administration (SSA). > **Explanation:** The CFPB regulates and oversees mortgage practices to protect consumers from unfair, deceptive, or harmful practices. ### Which term accurately describes additional money paid beyond the fixed initial payments in a GEM? - [ ] Equity balance. - [ ] Principal. - [x] Accrued interest. - [ ] Additional amortization. > **Explanation:** As payments increase over the GEM term, borrowers chip away more at the accumulated interest and principal, thus accelerating equity gain. ### GEMs help in reducing which type of cost over the life span of the loan? - [ ] Property insurance costs. - [x] Total interest cost. - [ ] Maintenance expenses. - [ ] Property taxes. > **Explanation:** GEMs reduce total interest costs through accelerated payment schedules, allowing faster principal repayments and interest savings. ### What is an alternative to a GEM for people with fluctuating incomes? - [x] Adjustable-Rate Mortgage (ARM). - [ ] Interest-Only Mortgage. - [ ] Zero Down Mortgage. - [ ] Balloon Payment Mortgage. > **Explanation**: An ARM might be suitable for those with varying incomes due to its initially favorable interest rates, followed by periodical adjustments reflective of current rates.