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Definition: GPARM stands for graduated-payment adjustable-rate mortgage. It is a type of mortgage that combines features of a graduated-payment mortgage and an adjustable-rate mortgage. The lender can periodically adjust the interest rate based on fluctuations in an external market index. The initial payments are lower than later payments, and they gradually increase as the borrower's income increases over time.
Example: Suppose a borrower takes out a GPARM with an initial interest rate of 3%. The mortgage payments start at $500 per month for the first year, then increase to $600 per month for the second year, and so on until the payments reach $800 per month in the fifth year. After the fifth year, the interest rate can adjust based on market conditions, and the payments can increase or decrease accordingly.
This example illustrates how a GPARM combines the features of a graduated-payment mortgage (lower initial payments that gradually increase over time) and an adjustable-rate mortgage (the interest rate can adjust based on market conditions).