Growing Equity Mortgage

A growing equity mortgage (GEM) is a full term home loan with an interest rate usually comparable to prevailing rates, in which payments increase yearly with the additional payments going towards principal reduction.

The interest rate can sometimes be fully indexed, which means that indices would influence the amount of interest charged. It can also be a fixed rate mortgage.

The result of such loan structures is that a borrower would be able to fully repay the mortgage in a shorter period compared to the normal amortization schedule.

It also implies that one won’t have to worry about negative amortization.

For example, if the required repayment is $500 per month for the first year and $600 for the following year, then the difference of $100 a month will be credited towards the outstanding principal.

This way, not only is the principal reduced in a growing equity mortgage, the tenure of the loan reduces as well.

The GEM program which is backed by FHA is also called the 245(a) mortgage.