What financing option gradually increases the monthly payment for principal and interest over a set period?

The financing option that gradually increases the monthly payment for principal and interest over a set period is the graduated payment mortgage. This type of mortgage is specifically designed to accommodate borrowers whose incomes are expected to rise over time.

With a graduated payment mortgage, the initial payments are lower, which can make homeownership more accessible to those entering the market or starting out in their careers. As the borrower’s financial situation improves, the payments increase at predetermined intervals. This structure allows the borrower to manage their cash flow better in the early years of the mortgage while preparing for higher payments in the future.

In contrast, a fixed-rate mortgage maintains consistent monthly payments throughout the life of the loan, and an adjustable-rate mortgage features payments that can fluctuate based on market interest rates. An interest-only mortgage initially allows the borrower to pay only the interest for a set period, leading to a balloon payment later on, but does not incorporate the graduated payment structure. This differentiation underlines why the graduated payment mortgage is the correct choice for this question.