Which mortgage type typically has lower initial payments but may result in higher payments later?

A graduated payment mortgage is designed to accommodate borrowers who expect their income to rise significantly over time. Initially, payments are set lower and can increase at predetermined intervals, often resulting in a more manageable start for the borrower. However, as payments rise, they can lead to significantly higher monthly obligations down the line, especially if the borrower does not see the anticipated income increase.

This structure allows for affordability in the early years, making it appealing for those confident in their future earning potential. It's important to understand that while this option provides short-term relief, the potential for higher payments later must be carefully considered to avoid payment shock or difficulties in maintaining the mortgage obligations.

For comparison, a fixed-rate mortgage has a stable payment throughout the term, an adjustable-rate mortgage features adjustable payments that can increase or decrease based on market rates, and an interest-only loan allows for lower payments in the initial years but does not reduce the principal balance, potentially leading to larger payments when principal payments begin.