The FHA has created the Growing Equity Mortgage or GEM for young families that want to buy a home but currently cannot meet the requirements to purchase a residence. The FHA sponsored program provides protection for lenders against the possibility of default while giving potential homeowners, with lower incomes, a way to secure a mortgage. GEM is intended for buyers who believe their income will increase in the future.
A GEM’s purpose is to pay off the loan principal faster than the traditional 30-year mortgage. In the first years of the loan, the payments are low, but as time passes the monthly payments increase gradually on a specific schedule. The specific plans vary somewhat, but, generally, the first year the homeowner payments are those of a 30-year mortgage, every 12 months they increase between one to five percent, and limit the life of the loan to no more than 22 years. The applicant must intend to use the property as his/her primary residence. Homeowners, under this program, can also apply for larger increases in their payment schedule to further shorten the life of their loan. The increases go to the principal, not the interest, and the loan is paid off more quickly. Because of this, the increased payments are building up the equity faster than would happen in a other loans. Homes that initially qualify are: one-to-four family homes; home purchases, refinancing, or rehabilitation; shares in cooperative housing; and units in condominiums.
While initial payments are low they are never low enough to create a situation know as negative amortization. This happens when a mortgage payment is too low to cover the interest due when the payment is made. The additional interest is added on to the principal and, instead of shrinking, the principal becomes larger than the original loan.