What are Negative Amortization Loans?

Negative amortization mortgages have payment options that allow reduced monthly payments on a loan are insufficient to pay the interest accruing on the principal. The additional interest cost is added to the loan balance. The increased loan balance results in higher interest expense and an increasing loan balance. Thus, the term negative amortization applies to the principal mortgage to cover the insufficient funds to amortize the loan balance.

The homeowner is, in effect, borrowing more money each month to cover the interest on the mortgage. The monthly payment is a deferred interest payment. Until the loan starts to amortize, there isnt a principal part of the monthly payment. Most people get these loans to aid current cash flow, but doesnt help to pay off the mortgage. This can be an effective form of finance for investing or a risky choice for someone with a misunderstanding or no plan.

What are the concerns and risks with Negative Amortization?

1. If the loan term ends without sufficient amortization, the remaining mortgage owned can be larger than the original mortgage.

2. The mortgage payment reset at some point with a higher payment amount once it goes into re-payment period.

3. The increase required in the monthly payment to repay the larger loan balance over a shorter period can be substantial.

4. Home values will not always increase, especially if mortgage and home equity rates continue to trend upward.

What are the benefits of Negative Amortization Mortgages?

1. Neg Am loans are usually easier to qualify for because the intro payment is lower.

2. Increased Purchase Power with the ability to borrow a larger loan amount than the borrower would otherwise qualify for based on their monthly income and debt-to-income ratio.

3. Lower Intro Rates may save Homebuyers looking for a short-term

4. Increased cash flow during the beginning of the loan.

This payment choice mortgage loan makes sense for people who have seasonal or erratic incomes or for savvy borrowers who want more flexibility for investments their money.