More on Mortgage and Financing

Understanding Negative Amortization Mortgages


By Sadiya Anjum

Ad:

Most people for obvious reasons are wary of Negative Amortization Mortgages. A negative amortization loan is risky but some times it may prove to be the best solution for some people. This kind of mortgage attracts people to its low monthly payments. So if you are going through a financial crunch, you may be able to afford a home for a low monthly payment that fits your budget.

A negative amortization is when your monthly payment is so low that it barely covers the interest. So the remaining interest which has not been paid is added to the principal. It may seem intimidating when you consider that your loan amount actually increases over a period of time instead of decreasing.

This mortgage is typically an Adjustable Rate Mortgage (ARM), meaning you have predictable payments over a fixed period. A minimum monthly payment is decided for a fixed period of time during which the extra unpaid interest is added to your principal. Each year your minimum monthly payment rises by a certain percentage. This percentage rate of change is called a cap. Even as the interest rate fluctuates, you are not required to pay more than what the cap dictates. This cap is generally about 7.5% and it dictates a change in your monthly payments every period. This period is again decided by your lender and is usually one year.

This is the absolute basic functioning of a Negative Amortization Mortgage. Most loans allow negative amortization to occur only for a certain period of time (5 years) or if the principal reaches a predetermined amount (say 115%) then the loan is recast. This means your monthly payments for the rest of the loan period will now be set for amortization – includes interest as well as principal.

There are several disadvantages to a negative amortization not counting the frightening increase of your principal. Negative Amortization will eat into the equity of your home as your loan amount keeps increasing. However if your property keeps increasing in value then you may be able to build some equity on your home. If property value does not increase and you keep making only the minimum monthly payments, the sale of your home will be useless. Not only will you have to give away every cent to your lender but you will continue to owe him more money.

This kind of mortgage is not recommended for those who are planning to live in the property for more than 3 or 4 years. The long term consequences of this kind of loan are grave. If you are unable to repay your loan, your property will fetch you nothing and may even leave you bankrupt.

A Negative Amortization Mortgage is tempting at first especially with its low introductory rates. Only minimum monthly payments are required that can easily fit your pocket and buy you a home. It is also easy to budget since you know the amount you are required to pay.

This mortgage has the potential to make your life very easy in the first few years. Despite its advantages, a Negative Amortization is a high risk loan for the inexperienced. You need to weigh your financial situation carefully and understand this mortgage as well as its consequences completely before deciding on it.

Article Source: ChoiceOfHomes.com - Real Estate Listings Online

This article may NOT be reprinted in any form without the express written consent of ChoiceOfHomes.com

More Articles and Information related to Real Estate

 

Residential Real Estate Listings           Homes for Sale      Homes for Rent

©Copyrights ChoiceOfHomes.com 2004-2006