Alabama Real Estate Practice Exam

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What defines a Graduated Payment Mortgage (GPM)?

  1. Interest-only payments for the first 10 years

  2. Balloon payment at the end of five years

  3. Smaller payments that increase annually until full amortization

  4. Payments decrease annually

The correct answer is: Smaller payments that increase annually until full amortization

A Graduated Payment Mortgage (GPM) is a type of mortgage where the payments start off smaller and gradually increase until the full mortgage is amortized. This allows for lower initial payments for individuals who may not be able to afford a higher mortgage payment but expect their income to increase in the future. Option A, interest-only payments for the first 10 years, does not accurately describe a GPM. In an interest-only mortgage, the payments only cover the interest on the loan and do not contribute to paying off the principal balance. Option B, a balloon payment at the end of five years, is typically associated with balloon mortgages, not GPMs. A balloon mortgage has smaller payments for a certain period of time and then a large final payment (the balloon payment) at the end. GPMs do not have a balloon payment at the end. Option D, payments decrease

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