What is a Growing Equity Mortgage (GEM)?

A Growing Equity Mortgage (GEM) is characterized by its structure of increasing monthly payments over time, which are specifically designed to reduce the principal balance of the loan more rapidly. This type of mortgage is beneficial for borrowers who expect their income to rise in the future, as they can start with lower initial payments that increase at a predetermined rate.

As the monthly payments increase, a greater portion goes toward paying down the principal, which can lead to substantial interest savings over the life of the loan. This option is structured to provide an affordability benefit initially while allowing for a payoff that is accelerated through escalating payments.

Other options do not fit this definition; fixed monthly payments would not decrease the principal as rapidly as a GEM. A loan that decreases payments over time would lead to increasing interest costs, contrasting the principal-reduction focus of a GEM. Lastly, a balloon payment indicates a significant payment due at the end of a loan term, which is not a feature of a Growing Equity Mortgage.