By A Growing Equity Mortgage (GEM) is a unique home loan designed to help borrowers pay off their mortgage faster while simultaneously building home equity at an accelerated rate. Unlike traditional fixed-rate mortgages, a GEM features increasing monthly payments over time, allowing homeowners to reduce their principal balance more quickly.
If you’re looking for a way to own your home sooner while minimizing interest costs, a Growing Equity Mortgage could be the perfect option.
In this guide, you’ll learn:
- What a Growing Equity Mortgage is and how it works
How GEMs differ from traditional mortgages
Pros and cons of a Growing Equity Mortgage
Who should consider a GEM
How to qualify for and apply for a GEM loan
Let’s dive into everything you need to know about Growing Equity Mortgages!
What is a Growing Equity Mortgage (GEM)?
A Growing Equity Mortgage (GEM) is a fixed-rate home loan where the borrower’s monthly payment increases over time, with the extra amount going directly toward the loan principal.
- Fixed interest rate – The loan rate stays the same throughout the loan term.
Gradually increasing monthly payments – Payments rise each year according to a set schedule.
Accelerated principal repayment – Helps homeowners pay off their loan faster.
Lower total interest costs – Since the principal is reduced faster, borrowers pay less interest over time.
Example: A borrower starts with a $1,500 monthly payment, which increases by 5% per year. After several years, the payments may grow to $2,000 or more, but the loan is paid off years earlier than a traditional 30-year mortgage.
How Does a Growing Equity Mortgage Work?
Here’s how a GEM loan operates:
Step 1: Fixed Interest Rate
- Unlike adjustable-rate mortgages (ARMs), GEMs have a stable interest rate throughout the loan.
Step 2: Scheduled Payment Increases
- The initial monthly mortgage payment starts lower than a traditional fixed-rate mortgage.
- Payments increase annually (typically between 2%–5% per year).
- The extra payment amount goes toward the principal, reducing the loan balance faster.
Step 3: Faster Loan Payoff
- Because more of each payment is applied to the loan principal, the mortgage can be paid off in 15–20 years instead of 30 years.
- This results in huge interest savings over the life of the loan.
Key Benefit: With a traditional 30-year mortgage, a large portion of early payments goes toward interest. With a GEM, more of your payment quickly reduces the loan balance, leading to faster equity growth.
Growing Equity Mortgage vs. Traditional Fixed-Rate Mortgage
| Feature | Growing Equity Mortgage (GEM) | Traditional Fixed-Rate Mortgage |
| Interest Rate | Fixed | Fixed |
| Monthly Payment | Starts lower but increases annually | Stays the same for the entire loan term |
| Loan Payoff Time | Typically 15–20 years | 30 years |
| Interest Paid Over Loan Term | Lower, since loan is paid off faster | Higher, since loan takes longer to pay |
| Equity Growth | Faster | Slower |
Best For: Borrowers who expect their income to grow over time and want to pay off their home faster.
Pros and Cons of a Growing Equity Mortgage
- Advantages of a GEM Loan
- Faster Homeownership – Pay off your home loan in less than 30 years.
Builds Equity Quickly – More of your payment goes toward homeownership rather than interest.
Lower Interest Costs – Since the loan is repaid sooner, you pay less interest over time.
Great for Career Growth – Ideal for professionals expecting future salary increases.
Disadvantages of a GEM Loan
- Higher Future Payments – Monthly payments will increase each year, requiring higher income.
Less Flexibility – If income doesn’t grow as expected, payments may become unaffordable.
Not Ideal for Fixed Income Earners – If you don’t expect salary increases, this loan may be risky.
Tip: A GEM is best for borrowers who anticipate rising income levels over the years.
Who Should Consider a Growing Equity Mortgage?
A Growing Equity Mortgage is ideal for:
- Young professionals with increasing salaries (e.g., doctors, engineers, IT professionals).
Borrowers who want to pay off their mortgage quickly.
People looking to save thousands on interest payments.
Homebuyers are comfortable with rising monthly payments. - Not ideal for retirees, self-employed individuals with fluctuating income, or those with tight budgets.
If you’re unsure, use a mortgage calculator to estimate future payments!
How to Qualify for a Growing Equity Mortgage
To qualify for a GEM, you’ll need:
- Good Credit Score – Typically 620+ for conventional loans.
Stable Income – Lenders prefer borrowers with steady employment and expected income growth.
Low Debt-to-Income (DTI) Ratio – Keep your DTI under 43% to improve approval chances.
Down Payment – Typically 5%–20% depending on lender requirements.
Tip: If you expect salary increases in the next few years, show your lender projected income growth to improve your chances!
How to Apply for a Growing Equity Mortgage
Step 1: Research Lenders Offering GEM Loans
- Not all lenders offer Growing Equity Mortgages, so check with banks, credit unions, and mortgage lenders.
Step 2: Get Pre-Approved
- Submit financial documents (pay stubs, tax returns, credit report) to determine loan eligibility.
Step 3: Compare Loan Terms & Payment Schedules
- Ensure you understand how much payments will increase annually.
Step 4: Finalize Your Loan & Purchase Your Home
- Work with a real estate agent and lender to complete the home-buying process.
Tip: Use a mortgage calculator to estimate future GEM payment increases before committing!
Conclusion
A Growing Equity Mortgage (GEM) is a powerful tool for homeowners who want to build equity faster and pay off their mortgage sooner. While it requires higher future payments, it offers significant savings on interest and a quicker path to full homeownership.
Key Takeaways:
- GEMs start with lower payments but increase yearly, reducing loan principal faster.
Best for borrowers with expected income growth who can handle rising payments.
Ideal for those who want to pay off their home in 15–20 years instead of 30.
Not suitable for retirees or those with limited future income growth.
Thinking of a Growing Equity Mortgage? Speak with a lender today to explore your options!
FAQs
1. What is a Growing Equity Mortgage (GEM)?
A GEM is a fixed-rate mortgage where monthly payments increase over time, with the extra amount applied to the loan principal to pay off the mortgage faster.
2. How does a Growing Equity Mortgage save money?
Since more of the payment goes toward the principal balance, the mortgage is paid off sooner than a traditional 30-year loan, reducing total interest costs.
3. Who should consider a Growing Equity Mortgage?
A GEM is ideal for borrowers expecting salary growth, such as young professionals, doctors, and business executives, who can handle rising payments.
4. What are the risks of a Growing Equity Mortgage?
The biggest risk is that monthly payments increase every year—if your income does not rise as expected, the loan could become unaffordable.
5. How long does it take to pay off a Growing Equity Mortgage?
Most GEMs are structured to be paid off in 15 to 20 years, instead of the standard 30-year mortgage term.
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