Office of Loan Programs

Introducing the Graduated Payment Mortgage
Jay Valancy
June 2002

The Graduated Payment Mortgage is the first new loan product under the Mortgage Origination Program (MOP) since its inception in 1984. Graduated Payment Mortgages have long been common with private lenders and are most commonly used by housing tract developers to encourage new home sales. In these programs, the developer arranges with a lender to temporarily reduce the interest rate for a set number of years.

With the Graduated Payment MOP (GP-MOP), the Borrower initially pays a lower interest rate (Borrower Rate) than the most recently published MOP rate (Standard Rate). The initial Borrower Rate is stated as a percentage below the Standard Rate. This percentage, known as the Interest Rate Differential, changes each year, so that the difference between the Borrower Rate and the Standard Rate gradually decreases. After a pre-determined number of years, the Borrower will pay the Standard Rate, and the loan will become a standard MOP loan. In no case can the Borrower Rate be less than 3.00%.

For example, assume that in the first year, for a $400,000 loan amortized over 35 years, the Borrower Rate is set at 2% below the Standard Rate. If the Standard Rate were 5.5%, the Borrower Rate would be 3.5% in the first year of the loan, reducing the first year monthly payment from $2,148.07 to $1,653.16. Assuming the Interest Rate Differential had an annual decrease of .25%, the Borrower Rate would be 1.75% below the Standard Rate in the second year of the loan. If the Standard Rate remained at 5.5%, the Borrower would then pay at an interest rate of 3.75% for the second year of the loan. However, given the variability of the MOP rate, the exact interest rate and payment change would not be known until the annual interest rate adjustment date. After eight years, the Borrower Rate would be equal to the Standard Rate in effect at that time. Accordingly, the interest rate the Borrower will pay during the initial years of the loan will "shadow" the standard MOP rate at a steadily increasing pace. (Click here) to see a graphic display of how these two rates would compare over the eight years of the graduated payment portion of this loan.

During the last ten years, the MOP rate has remained relatively stable or has declined. Assuming this stability continues, the interest rate and payment for GP-MOP borrowers will increase by a fairly predictable amount each year. However, in the event that interest rates rise substantially, the Borrower's payment could increase at a faster rate. GP-MOP loans are designed for individuals who anticipate that their income will increase in the future. Please note that unlike some other Graduated Payment Mortgages in the public sector, the GP-MOP payments by the Borrower are designed to fully amortize the loan and there is no negative amortization.

The GP-MOP differs from the traditional MOP loan in other ways. While the Loan-to-Value ratio thresholds are the same, the maximum Payment-to-Income ratio that will be used to qualify Borrowers has been reduced from 40% to 38%. Finally, the maximum term of a GP-MOP loan is thirty-five years (as opposed to forty).

Please contact your Campus Housing Programs Representative or the Office of Loan Programs if you would like additional information concerning this new product.

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