What is a Growing Equity Mortgage (GEM)?

A growing equity mortgage is a loan with a fixed rate with monthly payments that increase over time. The interest rate on the loan remains the same throughout its life – there is never a negative amortization.

Essentially this means that the first payment is an amortizing payment and as the amount paid per month is subtracted from the remaining balance of the mortgage.

A growing equity mortgage is useful for first time home buyers or young families who are not in a financial position to meet the obligations of high monthly payments. Therefore, by having payments increase over time it allows them to make paying the balance of the mortgage a lot easier.

It allows them to buy a home sooner than they would be able to by using conventional financing programs.

A growing equity mortgage is not the same as a graduated payment mortgage (GPM). A graduated payment mortgage has negative amortization, which means that the initial payments of a GPM are below what the full amortization payment would be – not creating interest savings.

According to the FHA, “Growing Equity Mortgages are eligible for insurance under Section 203(b) for one to four family homes; Section 203(k) for home purchase, refinancing, or rehabilitation; Section 203(n) for shares in cooperative housing; and Section 234(c) for units in condominiums.”

In real estate, the term ‘equity’ means the value of the house minus the mortgage outstanding. For example, if the property is worth $180,000 and the mortgage outstanding is $100,000, equity is $80,000.