How Negative Amortization Works in a Home Mortgage
Negative amortization loans are also known as payment option loans because the borrower has a minimum payment option that only covers part of the interest, an interest only option and at least one fully-amortizing option that lets them pay the mortgage off in as little as 15 years or over 30 to 40 years. According to Mortgage Loan Outlet, "negative amortization can be a valuable financial tool to borrower utilizing the payment option mortgage in the right situation for short term financing. The minimum payment option is calculated using the initial low introductory rate (typically 1% to 2%) to start with. Each year the payment increases 7.5% for the first five years. In the sixth year, the payment is then calculated using an index rate (typically LIBOR, MTA or COFI) plus an adjustable margin and amortized over the remaining term of the loan."
If the buyer makes only the minimum payment, negative amortization occurs because the payment doesn't even cover the interest. The shortfall is then tacked onto the principal balance. As a result, the principal balance ends up going up rather than going down as it does with conventional fixed-rate loans and ARMs. However, if the borrower chooses any of the other payment options, negative amortization will not occur--the principal will simply remain unchanged (if choosing the interest only option) or decrease like conventional loans.
Negative Amortization Refinancing
Deferred Interest Options
Payment Option ARM
80-20 Home Mortgages
Equity Loans Behind Pay Option ARM
1st Time Homebuyers
Interest Only Payments
Fixed Rate Lock Option
Fixed Rate Choice
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