As we continue on in our mortgage series, today in the spotlight is the growing equity mortgage. This is sometimes called “the rapid payoff mortgage,” we will call it GEM for short. The GEM has a fixed interest rate. However, monthly payments increase year by year. This increase may be determined in advance or be tied to a financial index like the flexible.
Unlike a flexible, the GEM is systematically amortized by these increases. Every cent of the mortgage payment increase is applied to repaying the principal.
Example: Suppose you opt for the GEM mortgage for $40,000 at 12% interest. First-year payments for principal and interest are $411 a month. Second-year payments are $461 a month–$50 more.
That $50 extra is applied 100% to paying off the mortgage principal. Monthly payments go up by $50 each year. This rapid payoff of principal means that less of the “base” $411 goes for the interest (since there’s less of a loan outstanding).
Money-Saving Result: A GEM is paid off within at least half the time of a fixed-rate loan, with a considerable saving in interest costs. A 30-year GEM, may be repaid within 13 to 17 years, depending on the payment increases.
If you like the GEM concept and think it may be for you, try getting one where the increases are determined in advance. This type of GEM is more easily budgeted for than one tied to an index.