Negative Amortization Mortgage
Loan: Advantages and Disadvantages
by Lisa Phillips
May 2007
Loan: Advantages and Disadvantages
by Lisa Phillips
May 2007
A Negative Amortization Mortgage loan (NegAm) is a product in which
the mortgage loan payment is less than the accrued interest due on
the loan. Negative amortization loans do not reduce the principal
balance of a mortgage loan.
The loan balance actually increases over time as the difference in the
payment and accrued interest is added to the balance of the loan.
NegAm loan payments are not applied to any of the principal balance
of the loan. Amortization is the reduction in the loan balance.
Features of a Negative Amortization Loan:
Advantages:
Lower Monthly Mortgage Payments. Payments on a negative
amortization loan are lower in the first few years of the loan. However,
the low payment does not cover all the interest or the principal on the
loan. The unpaid interest is added to the principal and the total
balance of the loan increases over time.
Flexibility in a Budget. Since home prices skyrocketed borrowers
are often priced out the market. A negative amortization loan allows
the borrower flexibility to purchase a more expensive home.
Benefits for the Savvy Borrower. Utilized correctly, a NegAm can
help the borrower purchase a home they could not afford with a 30-
year fixed rate mortgage. Payments are kept low in the early years on
the loan.
Borrowers have an opportunity to increase their income during those
early years. The house would have appreciated in value and the
borrower can refinance at a traditional, 30-year fixed rate mortgage.
To keep the loan non-negative, the borrower can pay a fully amortizing
payment based on the current interest rate.
Disadvantages:
Borrower Beware, Borrowers are attracted to this “teaser” rate
without full knowledge of how it works. Homeowners can be left with an
upside down balance on the loan.
Lack of Equity. They owe more on the mortgage loan than they have
equity. This puts homeowners at higher risk for default and foreclosure
as they cannot refinance because they have no equity in the home. If
you want to build equity in home and do not have the income to pay
the current fully amortizing rate, this may not be the loan option for you
the mortgage loan payment is less than the accrued interest due on
the loan. Negative amortization loans do not reduce the principal
balance of a mortgage loan.
The loan balance actually increases over time as the difference in the
payment and accrued interest is added to the balance of the loan.
NegAm loan payments are not applied to any of the principal balance
of the loan. Amortization is the reduction in the loan balance.
Features of a Negative Amortization Loan:
Advantages:
Lower Monthly Mortgage Payments. Payments on a negative
amortization loan are lower in the first few years of the loan. However,
the low payment does not cover all the interest or the principal on the
loan. The unpaid interest is added to the principal and the total
balance of the loan increases over time.
Flexibility in a Budget. Since home prices skyrocketed borrowers
are often priced out the market. A negative amortization loan allows
the borrower flexibility to purchase a more expensive home.
Benefits for the Savvy Borrower. Utilized correctly, a NegAm can
help the borrower purchase a home they could not afford with a 30-
year fixed rate mortgage. Payments are kept low in the early years on
the loan.
Borrowers have an opportunity to increase their income during those
early years. The house would have appreciated in value and the
borrower can refinance at a traditional, 30-year fixed rate mortgage.
To keep the loan non-negative, the borrower can pay a fully amortizing
payment based on the current interest rate.
Disadvantages:
Borrower Beware, Borrowers are attracted to this “teaser” rate
without full knowledge of how it works. Homeowners can be left with an
upside down balance on the loan.
Lack of Equity. They owe more on the mortgage loan than they have
equity. This puts homeowners at higher risk for default and foreclosure
as they cannot refinance because they have no equity in the home. If
you want to build equity in home and do not have the income to pay
the current fully amortizing rate, this may not be the loan option for you
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Related Topics:
- FHA Mortgage Loans, Basic Features and Loan Limits
- The Benefits of Fixed Rate Mortgages
- VA Homes Loans
- Hard Money Mortgage Loans
- Adjustable Rate Mortgage Loans
- Interest only Mortgage Loans
- Balloon Payment Mortgage Loans
- Benefits of making Bi-Weekly Mortgage Payments
- Options to Foreclosure
- Stop Foreclosure with Forbearance
- How to Request a Mortgage Loan Modification
- Downpayment Assistance Listed by State