What is a Growing-Equity Mortgage (GEM)?
Growing-Equity Mortgage (GEM) Definition
A Growing-Equity Mortgage (GEM) is a specialized type of home loan structured so that the monthly payments increase at set intervals—typically annually—while the interest rate remains fixed. Here are the key features:
- Fixed Interest Rate: The loan’s interest rate is typically fixed for its entire term.
- Scheduled Payment Increases: Although the interest rate does not change, the monthly payment rises (often by a predetermined percentage) over time. This increase in payment amount is applied directly toward the principal of the mortgage.
- Faster Equity Buildup: Because more money goes toward principal with each payment increase, homeowners can build equity more quickly than with a standard fixed-rate mortgage.
- Potential for Interest Savings: By reducing the outstanding principal faster, borrowers typically pay less total interest over the life of the loan compared to a traditional mortgage.
- Shorter Loan Term: The accelerating payments usually mean the loan is paid off faster—often in 15 to 20 years—without the need for a formal refinancing.
A Growing-Equity Mortgage can be advantageous for borrowers who expect their income to rise steadily and want to build equity quickly, thereby reducing overall interest costs. However, borrowers must ensure they can handle the scheduled payment increases throughout the life of the loan.
