A GPM allows a borrower to qualify at a payment lower than a comparable fixed-rate loan. By qualifying at a relatively lower payment, one can obtain a larger loan and potentially purchase a higher-priced home.

A GPM’s initial payments are lower than the minimum required to amortize the loan. Over a predetermined period of two to seven years, the payments increase by approximately 7.5 to 12.5 percent per year. Since the initial monthly payments are insufficient to amortize the loan, these loans feature negative amortization--the loan balance increases in the early years. A borrower has the option, however, to pay the fully amortized payment and avoid negative amortization.

There is a premium for receiving the benefits of a lower initial monthly payment--the interest rate is approximately .5 to .75 percent higher than a comparable fixed-rate mortgage. GPMs are available for Conforming and Jumbo loans.