At the end of every year, you find out that your yearly rent fee is around 25% of your annual income. However, you’ve envisioned how you will build your dream house from the little salary you’re earning. That seems difficult, right? Maybe you’ve never heard of the type of loan called a “growing-equity mortgage.” You may be wondering what a growing-equity mortgage is, its advantages, and its calculation. It has payments that gradually increase over time, which makes it easier for you to pay off your home earlier.
Here is all you need to know about a growing equity mortgage: its advantages, and calculation.
What Is a “Growing-Equity Mortgage”?
A growing-equity mortgage (GEM) is a loan with a fixed rate and monthly payments that increase over time. The interest rate remains the same throughout its life and there is no negative amortization. Instead, the first payment is a fully amortizing payment, and as the payment amount goes up over time, the additional amount beyond what will be a fully amortizing payment is applied directly to the mortgage principal. This also shortens the life of the loan and increases the overall interest savings.
A growing-equity mortgage is very useful for first-time home buyers who are not financially buoyant to meet the responsibilities of high monthly payments. Hence, having an increase in payment over time allows them to make paying the balance of the mortgage a lot easier.
Growing equity mortgages are usually repaid over 15 to 22 years instead of 30 years. This will help you to save tens of thousands of dollars in interest.
A growing-equity mortgage is best for workers that expect their earnings to increase as they advance in their careers. The aim of this type of loan is that both the monthly payments and your salary increase together.
The Advantages of a Growing-Equity Mortgage
As an employee, you will not worry yourself when a growing-equity mortgage starts going up. This is so because you will earn raises and promotions in your place of work to make it easier to pay your increased monthly mortgage costs. However, the increasing payments can be unfavorable if the promotions and the increase in salary you hoped for turn you down.
The following are the advantages of a growing equity mortgage:
#1. Early homeownership
One of the advantages of a growing-equity mortgage is that it makes it convenient for you to achieve early homeownership. This is so if your income is proper and predictable. You do need to pay the entire house purchase amount before you can own a house. All you need is the 30 per cent equity payment and funds to pay for closing costs. With these, you can move into your new house with a mortgage and repay the rest of 70 per cent of the house cost within 15 to 20 years.
#2. Cost-effective borrowing
Unlike other types of borrowing, the interest rates on a growing-equity mortgage are generally lower. Lenders can also offer a variety of mortgages, such as fixed rates, discounted deals, or trackers. It is best for you to find a mortgage deal that is perfect for your circumstances and also makes it an affordable option.
#3. A growing-equity mortgage gives you privacy and control
When you’re living as a tenant, you do not have the right to property access. In this case, the landlord or an employee of the landlord can enter your home at any time.
A growing-equity mortgage helps you own a home early, so you can have the privacy and control that homeowners enjoy. In this case, you make the rules of entry all by yourself. No one enters your house without your permission. You will do all this without asking anybody for approval. When you own a house, you can decide when to customize your house, remodel, and decorate without getting permission from anybody.
#4. Easy to repay
You can repay a growing-equity mortgage bit by bit on a monthly basis. Based on the interest rate, your monthly payback could well be much lower than the rent you would pay in your area.
#5. A growing-equity mortgage improves your credit rating
A growing-equity mortgage provides an opportunity to build a good credit history that you can leverage for future consumer credit. Timely repayments on a loan position you as a creditworthy borrower with proven capacity.
Your credit rating improves due to the measure of your ability to repay debt. Your credit rating also reduces your future cost of borrowing. Hence, the credit rating as a measure of ability can get worse if there is a default or failure to meet repayment terms, reducing your ability to access credit and increasing your cost of accessing it.
#6. Help to buy
The UK government has introduced a number of initiatives in recent years designed to make taking out a mortgage more affordable. Shared ownership, for instance, can make buying a home a viable option even in more expensive locations.
Disadvantages of a Growing-Equity Mortgage
The following are the disadvantages of a growing-equity mortgage:
By taking a growing-equity mortgage, you’re taking on a commitment to pay back a lot of money within a certain period of time, including interest. Even over 25 years, you will be paying a lot more back than you borrowed.
If you can’t repay the money borrowed from the mortgage loan, your home will be repossessed. If you cannot keep up the monthly payment on your home, you must speak to your lender as soon as possible.
#3. Secured loan
A growing-equity mortgage is a secured loan against your property. So if you can’t keep up with repayments, you could end up losing your home.
Growing-Equity Mortgage Calculation
It is possible to estimate your monthly payment by hand using a standard formula. It is also easier to use an online mortgage calculator. Whichever way, here is what you will require for a growing-equity mortgage calculation:
#1. Determine your mortgage principal
They call the starting loan amount the mortgage principal.
If, for instance, you have $200,000 cash and want to make a 20% down payment on a $600,000 home, you will need to borrow $400,000 from the bank to complete the purchase. The mortgage principal is $400,000. If the mortgage rate is fixed, you will pay the same amount every month. When you make a monthly mortgage payment, you will have less money to pay toward interest and more money to pay toward your principal.
#2. The calculation of a growing-equity mortgage monthly interest
The important fee the bank charges you when you borrow money is the interest rate, which is expressed as a percentage. Normally, if you have a high credit score, a high down payment, and a low debt-to-income ratio, you will secure a lower interest rate. Annual interest rates are provided by lenders for mortgages. If you need the monthly interest rate to calculate the monthly mortgage payment by hand, all you need to do is divide the annual interest rate by 12 (i.e., the number of months in a year).
#3. Calculate the number of payments
Mostly, the common terms for a fixed mortgage are 30 years and 15 years. To get the number of monthly payments, you will multiply the number of years by 12 (the number of months in a year). A 30-year growing-equity mortgage would require 360 monthly payments, and a 15-year mortgage would require 180 monthly payments. You only need these figures if you’re fixing the numbers into the formula.
#4. Mortgage private insurance
Private mortgage insurance (PMI) is required if you have less than 20% of the purchase price when you get a regular mortgage. The lender will add your mortgage insurance to your monthly payments. The PMI typically costs between 0.2% and 2% of your mortgage principal, but the exact cost will be detailed in your loan estimate.
#5. Cost of property taxes
A monthly growing-equity mortgage payment calculation will often include property taxes. The lender will collect this and then put it into an escrow or impound account. The taxes are paid to the government at the end of the year on the homeowners’ behalf.
The value of your home and local tax rates will determine how much you owe in property taxes. Just like income taxes, the amount the lender estimates the homeowner will need to pay could be more or less than the actual amount owed. If the amount you paid into the impound account is not enough to cover your taxes when they come due, you will have to pay the difference, and your mortgage payment will likely increase.
#6. Consider the cost of homeowners’ insurance
It is likely that every homeowner that takes a growing-equity mortgage will be required to pay homeowners’ insurance. Homeowners’ insurance consists of eight different types, so ask a company about which type of coverage is best for your situation when you buy a policy. Insurance policies with a high deductible will typically have a lower monthly premium.
A growing equity mortgage helps you to be an early homeowner as it has a lower interest rate and it is easy to repay as it is paid bit by bit on a monthly basis. when a growing equity mortgage starts going up, you will also earn raises and promotions in your place of work, this makes repayment easy without much worry.
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FAQs On Growing-Equity Mortgage
What is an equity participation mortgage?
An equity participation loan is a loan whereby the lender agreed to a reduced interest rate in exchange for a portion of the cash flows of a commercial real estate and a portion of the appreciation in value of the property.
What is the difference between a graduated payment mortgage and growing equity mortgage?
These two loan types are often confused because they work in a similar fashion. however, unlike a growth equity mortgage where payment increases over time, a graduated-payment mortgage creates a negative amortization by allowing the borrower to pay less than the required amount.
What type of mortgage loan is the most common and generally viewed as the most secure?
The most typical and first sort of mortgage that springs to mind when considering a house loan is a conventional loan. Almost every mortgage lender provides them.