Negative Amortization

Occurs when your monthly mortgage payments submitted are not sufficient to pay all interest and principal due on the loan. The unpaid interest is added to the unpaid balance of the mortgage. It could be considered borrowing equity from yourself. The period of time the neg-am is applicable is usually limited on each mortgage.

Neg-am or Negative amortization loan usually have a recast period to the loan conditions. Make sure that the recast period is 5 year or more. This will give you enough time to refinance if you are still in the loan. Contact a Mortgage Professional in regards to which lenders have a recast past 5 years.

Negative amortization
When a borrower's monthly payment is too small to cover both the principal and interest of a loan. In this case, the unpaid interest is added to the outstanding balance of the loan. The danger of negative amortization is that it gradually increases the mortgage debt, and therefore the home buyer can end up owing more than the original amount of the loan.

When doing financing that has a potential for negative amortization make sure you fully understand and feel comfortable with what that means to your individual situation. Your Loan Officer can go over the risk and benefits of the program you choose.

When used properly, mortgage loans with potential negative amortization characteristics can be beneficial to homebuyers who want to pay as little in monthly payments as possible in the first few years of the loan term.

What's good about negative amortization is that your payment doesn't have to increase just because the interest rate on your ARM went up. The lender can also price the loan more aggressively because a payment cap doesn't mean that the lender can't pass along an interest rate increase. What's bad about negative amortization is that the payment will eventually reset to a level to allow the loan to amortize over its remaining life. The increase in the monthly payment needed to repay the larger loan over a shorter time span can be substantial. If rates have increased substantially, then refinancing may not be a viable option.

When mortgage payments do not cover the full amount of interest due, and the unpaid interest is added to the principal balance of the loan. Under standard amortization, the principal balance decreases with each payment.

Although no one likes the term "negative" a loan with negatiive amortization is not always a "negative" for the borrower. The essence of such a loan is that the lender allows the borrower to use a little bit of their equity each month to keep their payment low. The additional cash flow created can often keep the borrower from incurring more expensive debt (such as credit card debt) and in most cases that is a "positive."

A negative amortization loan is a rising balance loan. It differs from a fully amortized loan in that the payments made on a fully amortized loan are paying down a principal balance. A neg-am loan does not decrease the principal balance, it adds to it. This loan can be very useful for cash flow oriented projects in that the monthly payment can be fairly low.

Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.

Negative amortization can occur with the Option Arms (1% or similar start rates) and reverse mortgages.

A gradual increase in mortgage debt that occurs when the monthly payment is insufficient to cover the interest due, and the balance owed keeps increasing (at least in the first few years).

Some investors use Neg Am loans to increase their cash flow on a property. Usually they plan on selling or refinancing the property is just a few years when using this type of loan.

In most areas where housing prices at a minimum double over the course of 10 years, negative amortization may be less of a concern, and the additional cash in your pocket may be more than worthwhile for individuals who prefer to invest their money in asset classes other than real estate.

Credit card interest rates and payment plans are examples of negative amortization. Most credit cards carry high interest rates yet require a low minimum payment. By paying the minimum, the payment expectancy increases dramatically. Conversely, the low minimum payment allows you to allocate your payments to other debts or bills.

Negative amortization is not always a bad thing, in most cases it is tax deductible. Also in many areas these loans are being used the appreciation of the home is far exceeding the deferred interest.

Most loans with a negative amortization clause will convert the payment to a principal and interest payment if the loan balance is at 115% of the original value of the property.

Negative amortization is not necessarily a "negative" thing. Home owners who understand its usefulness often benefit greatly.

Clients should always be informed if a loan program can have negative amortization. Option Arms can have negative amortization if the client only pays the minimum payment option. Explaining to the client that paying one of the other three payment options; the interest only option, principal and interest 30 year amortized or principal and interest 15 year amortized, are ways to avoid negative amortization.

Regarding the Recast term on a Negative Amortization loan: It can be based off of five years or when the deferred loan amount reaches 110% or 125% of the original loan amount (depending on the lender) which ever comes first.

Reverse Mortgages deduct the interest owed against the principal in your home resulting in Negative Amortization.

Negative amortization is also often referred to as "deferred interest"

This type of mortgage is also sometimes known as a Graduated Payment Mortgage (GPM).

Deferred interest, which is often equated to negative amortization, is seen by many borrowers and investors as a monthly draw account akin to a home equity loan. In this model, borrowers who choose to make a minimum payment are effectively cashing out the difference between their fully amortizing payment and the minimum payment amount, at a predetermined interest rate with no closing costs. This "cash flow" advantage is one of the key reasons borrowers from all walks of life have benefited from negative amortization.

Negative amortization literally means not amortizing, or not decreasing a debt through regular payments. In effect you are deferring the interest. This can be useful as it requires lower payments initially. Remember though the interest deferred must eventually be paid off.

All NegAM home loans eventually require full repayment of principal and interest according to the original term of the mortgage and note signed by the borrower.

Many Negative amortization loans can be high risk loans for inexperienced investors. These loans tend to be safer in a falling rate market and riskier in a rising rate market.

» DISCLAIMER: The information contained in this article on 'Negative Amortization' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.