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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
  • Self-Employed Loans
  • 80-20 Home Mortgages
  • Equity Loans Behind Pay Option ARM
  • 1st Time Homebuyers
  • Interest Only Payments
  • Fixed Rate Lock Option
  • Fixed Rate Choice

Additional Home Equity Options from Smart Home Equity
Home Equity Loans
Get money quickly with equity loans for home improvement or consolidation
2nd Mortgage Refinance
Pay off your HELOC or adjustable 2nd.
Home Equity Credit Line
Revolving credit that can be accessed as cash against home equity.
Home Equity - Interest Only Payment
Home equity loans that require only the interest paid each month. Good low payment option!
Home Equity Refinancing
Refinance you home equity line with a fixed rate loan term.
Bad Credit Home Equity Credit Lines
Get money for bill consolidation even if your credit scores are low.
Home Equity 125%
Pay off credit cards and adjustable rate loans with no equity needed.
Debt Consolidation Loans
Consolidate loans and credit cards for reduced monthly payments that save you more money!