Negative Amortization Mortgage (Types)

Negative amortization mortgage loans are marketed under several different names and come in four basic varieties:

Option ARM - Adjustable Rate Mortgage w/ 4 Payment Options and a rate which adjusts each month. Very popular and common loan in certain states, including California, New York, Florida and other high cost areas due to extremely low (Typically 1%) mortgage minimum payment.

Fixed Rate Option ARM - Adjustable Rate Mortgage w/ 4 Payment Options and a Fixed Rate "start", or introductory period of 3 years or 5 years, up to 7 or 10 years where the rate, payment, or both remain fixed, after which time the rate become variable.
also known as a "Hybrid" Option ARM

30 Year Fixed Rate Option Loan - A True Fixed Rate Mortgage with 4 different payment options each month. Minimum payment option usually only available for the first 5 or 10 years or until the loan balance exceeds the negative amortization cap.
also known as a 30 Year Fixed Rate Cash Flow Loan

Reverse Mortgage - a loan which allows retired homeowners to receive substantial cash out, in the for of an annuity, lump sum of cash, or combination of the two, without requiring the retired homeowners to make any monthly payments. Not offered by all mortgage companies, and limited to smaller loan amounts and specific property types.

Negative amortization can only arise on ARMs with one or more of the following features:
1) The initial payment does not cover the interest due.
2) The interest rate adjusts more frequently than the monthly payment.

The negative amortization mortgages may increase the principal balance on the loan if the monthly interest payments are less than the interest accrued for the month. These mortgages usually have a recast feature when the princpal balance reaches a specific percentage over original principal balance.

Negative amortization, also known as NegAm, is an amortization method in which the borrower pays back less than the full amount of interest owed to the lender each month.

Negative amortization loans can be beneficial for consumers who receive large annual bonuses as part of their compensation package. This allows the consumer to make one larger, lump sum payment once a year while paying a smaller payment the other 11 months of the year.

Negative amortization loans will no longer allow the low negative amortization payment when your loan balance becomes too high. Your loan payments will increase at this point.

» DISCLAIMER: The information contained in this article on 'Negative Amortization Mortgage (Types)' 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.