Negative Amortization

When mortgage payments on a loan do not cover the full amount of interest that is due, any unpaid interest is then added to the principal balance of the loan. Under a standard amortization, the principal balance decreases with each payment over until the loan is completely paid in full.

The most common home mortgage loan that can incur negative amortization is the Pay Option ARM loan. This loan is one which provides the borrowers with multiple payment options on their monthly mortgage statement each month. The lowest payment option each month can possibly have negative amortization occur. Negative amortization is when the payment made does not have enough to cover the interest on the loan and your loan balance actually increases instead of goes down.

Negative Amortized loans are often a good choice for investors. The monthly payment is lower than regular loans, which means more cash flow for other investments. An investor often knows exactly how long he plans on keeping a home and how much profit he stands to make, so the deferred interest is accounted for at the beginning of the project.

In some cases an Option ARM, or negative amortization loan, is also a good option for the self employed, seasonal and commissioned employees. This gives you the flexibility to make minimum payments in a slow part of the year, and make larger than normal payments during busy months. This does however require discipline. Making the minimum payment every month will cause your mortgage balance to increase, rather than decrease over the long term.

If you are considering a "Neg Am" mortgage, make sure you check on how long the prepayment penalty is. In a lot of cases, if you sell or refinance the home within the first three years, you will be charged a substantial penalty.

The penalty for paying off an Option ARM can often be six months worth of interest.

While this type of mortgage can make sense in a rapidly appreciating market (when the increased property value will offset any additions to the principal), you still need to be careful and make sure you understand what you are getting.

There are many aspects to a Negative Amortization loan. One of the big things to also take into consideration is the index that it's based off of. The more stable the index, the more stable the rate.

Negative amortization loans are high risk loans for inexperienced investors. These loans tend to be safer in a falling rate market and riskier in a rising rate market. Check with your experieced mortgage broker to find out how you can take advantage of this high leverage mortgage.

With recent changes in the secondary market, there are not as many high loan to value negative amortization programs available. However, there are still many options available to the sophisticated consumer who understands fully the workings of a negative amortization loan.

Negative amortization loans are still available in jumbo loan amounts for borrowers whose incomes and assets are substantial, and more saliently, documentable.

» 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.