Pros and Cons of Growing-Equity Mortgages (GEMs)

Clever Real Estate


Clever Real Estate

October 21st, 2021
Updated October 21st, 2021


Growing Equity Mortgages or GEMs Mortgages can be the ideal way for young or first-time homebuyers to enter the market. They increase mortgage payment requirements periodically, which helps you put more equity into your home and cuts the time needed to pay off your mortgage.

selling a home with a mortgage

The first question many people have about Growing Equity Mortgages or GEMs is usually, “What are they?” Put simply, they are mortgages where the monthly payments increase over the lifespan of the loan. This increase can be monthly or yearly.

That doesn’t sound like a positive. But GEM mortgages can save you money in the long run. The monthly mortgage payments increase at a fixed rate and are applied toward the principal of the loan, not the interest. This way, the homeowner can pay off the loan much quicker – sometimes in half the time.

1. GEMS Help Save Money on Interest

The main advantage of GEMs is that you will save a significant amount of money in interest. The mortgage payments are scheduled to increase on an agreed-up period, but the increases go toward paying off your principal.

This means that you can pay off your loan much more quickly. In fact, it is usually a period of 15 years – about half as long as conventional mortgage lifespans. That can save you tens-of-thousands of dollars in interest payments because you will have less accumulated on your loan.

2. They Do Not Have Negative Amortization

There is no negative amortization with GEMs. Negative amortization is when the money owed increases due to the fact that monthly payments are so low. It usually occurs when payments are low (usually the minimum) and interest rates are high. Think of it similarly to paying just the minimum balance on credit card payments with a large balance.

3. GEMs Mortgages Help Accumulate Equity Faster

Growing Equity Mortgages do more than just help you pay off your loan faster. It’s true that they save you money on interest in the long run. But they can also provide a big source of near-immediate financing through the equity in your home if needed.

GEM mortgages put more money directly into your home (instead of on interest payments) because your monthly or yearly payments are increasing. This can be useful if you want an equity loan – for renovations, repairs, or any number of things -- leveraged on the equity in your home.

4. GEMs Are Ideal for Young and First-Time Buyers

GEMs can be the perfect mortgages for people just starting out their careers or about to buy their first home. They have lower upfront payments and costs. That’s good for those people anticipating higher incomes in the future.

Lenders can offer GEMs to people who would otherwise not be able to afford their home costs initially but believe they will be able to make larger payments in the future. Under government guidelines, anyone who has a reasonable expectation of earnings increases can apply for a GEMs mortgage.

5. Your Mortgage Payments Will Rise Over the Years

There is one major caveat to GEMs. The plans are dependent on a borrower being able to afford higher and higher payments into the future.

That means he or she must be in a position to expect their earnings to increase. That suits young professionals who are on a career path with clear avenues for promotions.

But there is always the danger that life does not unfold as expected. A borrower could lose his or her job or not get a needed promotion. The borrower needs to ensure his or her income increases regularly to keep pace with rising monthly payments.

Are You Considering a GEM Mortgage?

There are a lot of advantages to Growing Equity Mortgages. GEM mortgages can help homebuyers enter the market with lower initial upfront costs. But they are also dependent on increasing mortgage payments in the future.

Home buyers interested in GEM mortgages should always consult with a Clever Partner Agent before making any final decision. They will be best able to advise you on the type of financing to pursue. An experienced real estate agent can also put you in touch with trustworthy lenders and loan officers.

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