VA Loans: The Growing Equity Mortgage
There are many different types of VA home loans. Some of them are designed for a specific purpose–the new purchase home loan and the refinancing loan, for example. Others are created for one purpose or the other but with a different type of structure to the loan in terms of interest rates and/or monthly payments such as the VA Adjustable Rate Mortgage (ARM) and the Growing Equity Mortgage (GEM).
The VA GEM is a type of loan that features payments that start at one level, but increase over time with the amount of that increased payment applied to the principal balance. Why would a borrower want to choose a mortgage loan that features increasing payments? That depends on the borrower’s strategy and financial goals.
According to the VA loan rule book, “Compared to the standard amortization plan, GEMs have a faster accumulation of equity and earlier loan payoff.” Any borrower who wants to pay off a VA loan earlier than the standard 30-year mortgage might do well to explore the option of a Growing Equity Mortgage.
VA Pamphlet 26-7, Chapter Seven describes the VA GEM:
“GEM amortization plans are generally acceptable for VA loan purposes. The initial payment on a GEM is typically based on what the payment would be for a 30-year mortgage under the standard amortization plan. Payment increases can be fixed or tied to an index.”
What does that mean? The VA loan rule book provides some examples of how a VA GEM can be structured:
“Example 1: Monthly payments are increased by three percent each year for the first 10 years. The payments level off in the eleventh year and remain constant through loan payoff. Loan payoff may occur within a few years of the leveling off of the payment, depending upon interest rate.”
“Example 2: The increases in the monthly payments are based on a percentage of a Department of Commerce index that measures per capita, after-tax disposable personal income in the United States.”
This may sound perfect for any borrower looking to pay off early, but it’s important to anticipate the increases of the mortgage payment–so much so that the VA loan rules advise the lender to take this into account when considering a GEM for loan approval. “The lender must determine that the applicant’s income can reasonably be expected to keep pace with the increases in the monthly mortgage payment.”
In some cases this may not be an issue, in other cases a borrower may not know how their income might adjust as the mortgage payment increases. A borrower does not have to apply for a GEM in order to pay off early–there’s no penalty for early payoff with any VA mortgage. But in the case of GEMs, the borrower not only chooses to pay more over the lifetime of the loan, but that added payment is a requirement.
The fact that the additional payment is applied directly to the principle of the loan is what makes a GEM appealing to some borrowers. This type of loan may not be right for all applicants, and it also may not be offered by all participating VA lenders. Ask your loan officer about the VA Growing Equity Mortgage if you’re curious about this option.
Do you have questions about VA home loans? Ask us in the comments section.