Graduated Payment Loan Calculator (Rising Payments)

How it works

Payment in year y = A₁ × (1 + g)^min(y − 1, G) · A₁ = P ÷ Σ (1 + g)^min(y − 1, G) × a₁₂ × (1 + i)^(−12(y − 1)) · a₁₂ = [1 − (1 + i)⁻¹²] ÷ i · i = annual rate ÷ 12

A graduated payment loan starts with a lower payment that rises by a set percentage every year for a number of years and then stays level. It was designed for borrowers whose income is expected to grow — the US FHA Section 245 graduated payment mortgage raises payments 7.5% a year for five years, and some Spanish and Latin American lenders offer “cuota creciente” mortgages. The trade-off is that you repay principal more slowly at first, so total interest is higher and, if the early payments are below the interest, the balance can grow (negative amortization).

Worked example

A 200,000 loan at 6% for 30 years with payments rising 3% a year for 10 years starts at 976.23 a month — 222.87 below the level payment of 1,199.10 — and climbs to 1,311.97 from year 11. The first-year payments are below the interest, so the balance peaks at 200,293.25 before falling. Total interest is 249,168.65 versus 231,676.38 with level payments: 17,492.27 more.

Sources: HUD — Section 245(a) program description (archived) · Wikipedia — Graduated payment mortgage loan

Frequently asked questions