VA Lender’s Handbook Ch7 P17 (GEMs)

Growing Equity Mortgages (GEMs)

How to build equity

Deciphering the VA Lender’s Handbook Chapter 7 Part 17


The last three articles have covered Graduated-Payment Mortgages, which are similar in some respects to Growing Equity Mortgages, but different in other, very important respects. The main difference between a graduated payment mortgage and a growing equity mortgage (GPM vs. GEM), is that the first payments on a GEM are fully-amortizing, while those on a GPM are not. Fully-amortizing means that you’re paying off as much interest as you owe for that month, and as much principal as you need to in order to pay off the loan on time. GPMs are a way for borrowers who don’t have as much income right now to get a home they wouldn’t otherwise be able to get, while a GEM is a way for a borrower to pay off his or her home much  more quickly than they otherwise could.


The VA allows borrowers to get a GEM if the lender is willing to offer it. In a GEM, the monthly payments gradually increase, with all of the increase going towards paying off the principal. Paying off a GEM goes much faster than paying off a standard amortization schedule, and the borrower accrues equity much faster as well (hence the name). There are two different ways a GEM can be done, and it has to do with whether the increases in the monthly payment happen based off of a fixed schedule or are tied to an index. In either case, the initial monthly payments are always fully-amortizing and are usually based on what the monthly payment would be for a 30-year mortgage based on a standard amortization plan. It’s important to remember that the classification of a GEM, GPM, or standard amortization is wholly separate from that of fixed-rate or adjustable-rate. While most GEMs are fixed-rate mortgages, theoretically a GEM could also be an ARM or a hybrid ARM (that would make for some immensely complicated amortization schedules).


If payments on a GEM are increased based on a fixed schedule, that schedule usually occurs in two phases. The first phase is the growth phase – where the monthly payments gradually increase each year. This phase is usually around 10 years though it can be less or more as desired. The second phase would begin in the 11th year, and is the point where the monthly payments stop increasing and hold steady at their highest level until the loan is paid off. The second way the payments can increase is by following an index. Here is an example from the VA Lender’s Handbook: “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.”


As far as underwriting goes, the lender’s main concern is making sure that the borrower’s income is likely to keep up with the increases in the monthly payment. If the lender isn’t confident that the borrower’s income will really increase, they probably won’t sign off on the loan.


So as a borrower, when would you use a GEM? While it certainly sounds like a good thing to do if you can, there are a surprisingly small amount of scenarios where it really is the best thing to do. If you’re planning on staying in your current house until it’s paid off, don’t want to refinance at any point, and have a reasonable expectation that your income is going to go up a lot in the near future, then a GEM is a perfect fit. If your income doesn’t go up the way you expect it to, a GEM could be your worst nightmare, and if you move or refinance in only a few years, you put extra stress on your monthly budget without any noticeable benefits.
If you’re interested in a GEM, check with a VA-approved lender to see if they offer them, and see if they can provide any extra perspective on your specific situation to say whether a GEM is a good fit for you or not. A Growing Equity Mortgage is just one more option in a wide array, and it may just not be a good fit. Many people get standard amortization schedules then make extra principal payments when and how they can, and they find it to be a better fit than a GEM.

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