What is a Growing-Equity Mortgage (GEM)? Explained: How It Works, Types, and Examples


Growing-equity mortgage (GEM) is a dynamic variation of fixed-rate mortgages, featuring scheduled payment increases that contribute directly to reducing the principal and shortening the loan term. This method, often growing at a rate of 5% annually, enables borrowers to pay off their mortgage faster, build home equity swiftly, and benefit from lower total interest payments. FHA-backed GEM loans cater to individuals with a potential for earnings growth, offering protection to lenders in case of borrower default.

What is a Growing-Equity Mortgage (GEM)?

A growing-equity mortgage (GEM) stands as a unique variant of fixed-rate mortgages, distinguishing itself by the scheduled increase of monthly payments throughout the loan term. Unlike traditional fixed-rate mortgages, where payments remain constant, GEMs employ a predetermined schedule to gradually raise payment amounts. Importantly, the interest rate remains unchanged, and negative amortization is never a factor. The initial payment is fully amortizing, and as the payments escalate, the surplus is directly applied to the remaining mortgage principal. This proactive approach not only shortens the loan’s life but also enhances overall interest savings.

How growing-equity mortgages work

A growing-equity mortgage operates by allowing borrowers to expedite the repayment of their fixed-rate mortgage through scheduled, increasing principal payments. These additional payments, typically rising at a rate of up to 5% annually, contribute not only to early loan payoff but also to the rapid accumulation of home equity. It provides borrowers with the potential to leverage their home equity if needed. However, a crucial consideration is that as payment amounts increase annually, homeowners must experience corresponding salary growth or enhanced ability to meet larger payments.

A key distinction to note is that a growing-equity mortgage should not be confused with a graduated payment mortgage. While both feature fixed interest rates and increasing payments, a graduated payment mortgage introduces negative amortization. Initial payments on a graduated payment mortgage are set below a fully amortizing payment, resulting in negative amortization and lacking the interest savings characteristic of a growing-equity mortgage.

Other considerations for GEMs

Applying for a growing-equity mortgage shares similarities with other mortgage types, including comparable credit requirements. This mortgage option may offer lower down payment alternatives, making it particularly attractive to first-time home buyers facing upfront purchasing costs. Some lenders targeting this demographic collaborate with growing-equity mortgages.

Moreover, GEMs are not exclusive to conventional borrowers. The Federal Housing Administration (FHA) extends a growing-equity mortgage program, designed for borrowers with limited income but a reasonable expectation of future earnings growth. FHA insurance safeguards lenders against borrower defaults, covering a range of scenarios, including new purchases, refinancing, and property rehabilitation.


Here is a list of the benefits and drawbacks to consider.

  • Accelerated mortgage repayment
  • Rapid home equity accumulation
  • Lower total interest payments
  • Dependency on annual salary growth
  • Requires financial flexibility
  • Not suitable for fixed-income individuals

Frequently asked questions

How do growing-equity mortgages differ from traditional fixed-rate mortgages?

Growing-equity mortgages differ by featuring scheduled payment increases over time, contributing to accelerated principal repayment and overall interest savings. Traditional fixed-rate mortgages, in contrast, maintain constant and equal payments throughout the loan term.

Is a growing-equity mortgage suitable for first-time home buyers?

Yes, some lenders offering growing-equity mortgages target first-time home buyers, providing options for lower down payments. This makes it an attractive choice for individuals navigating upfront purchasing costs.

What role does the Federal Housing Administration (FHA) play in growing-equity mortgages?

The FHA extends a growing-equity mortgage program, particularly benefiting borrowers with limited income but potential earnings growth. FHA insurance protects lenders against defaults, covering various scenarios, including new purchases, refinancing, and property rehabilitation.

Key takeaways

  • Growing-equity mortgage (GEM) features scheduled payment increases, expediting mortgage repayment.
  • Payments rise annually, contributing to rapid home equity accumulation, often at a rate of up to 5% per year.
  • FHA-backed GEM loans target borrowers with a potential for earnings growth, offering lender protection in case of defaults.
  • GEMs may appeal to first-time home buyers with options for lower down payments.
View article sources
  1. Appendix IV-23 GEM Prosp Form Combined Guide Test – Government National Mortgage Association
  2. Overview Understanding Home Mortgages – Northern Kentucky University
  3. Chapter 28: Growing Equity Mortgage Pools and Loan – Government National Mortgage Association
  4. Growing Equity Mortgages (GEMs) – United States Department of Housing and Urban Development
  5. What Is a Growing-Equity Mortgage? – SuperMoney