What feature is characteristic of a graduated payment mortgage?

A graduated payment mortgage is designed to accommodate borrowers whose income is expected to increase over time. One of its defining characteristics is that it often starts with lower payments that will gradually increase over the term of the loan. In the early years, these lower payments may not cover the full amount of interest accruing on the loan, leading to negative amortization. This means the total amount owed can actually increase, as the unpaid interest is added to the principal balance.

This feature is beneficial for those who anticipate higher earnings ahead and prefer to manage their cash flow in the initial years without immediately committing to higher fixed payments.

The other options do not accurately describe the nature of graduated payment mortgages. For instance, a lower interest rate in the early years is not a defining feature; it focuses more on payment structure than on interest rates themselves. Additionally, constant principal payments with variations in interest don’t align with graduated payment structures, where payments are not constant. Finally, the idea of an interest rate related to a sliding index doesn’t fit into the graduated payment framework, which is primarily concerned with payment levels rather than interest rate indexing.