Beware of Negative Amortization when Using ARMs to Purchase Property

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Beware of Negative Amortization when Using ARMs to Purchase Property
(presented by www.refinance-refinance.net - mortgage lenders)

By Adam VanBuskirk

When buying a property, a loan from the mortgage broker or local bank is often needed by the purchaser to purchase the property. There are two mainstream types of loans (with different variations of each); fixed-rate loans and adjustable-rate loans (from this point forward referred to as ARMs). The paragraphs below outline the dangerous possibility of negative amortization when using an ARM to finance a real estate purchase.

An ARM is a mortgage that has an interest rate that adjusts periodically, often every six or 12 months. At these intervals, the interest rate is compared to a variable, often the interest paid on 30-year Treasury Notes (there are many benefits and disadvantages to using an ARM which are outside the scope of this article). With the basic understanding of an ARM cleared up, it is time proceed to the primary purpose of this article; negative amortization.

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On a normal 30-year fixed loan the loan balance is gradually reduced as one makes monthly mortgage payments. This process of lowering the loan balance over time is called amortization. This same process also happens with ARMs with one major difference. The ARM has the potential to reverse the amortization process, thus adding to the loan balance and the amount that one owes on the loan. This is called negative amortization and it can literally destroy ones credit, lead to bankruptcy, and cast financial doom on the buyer for years to come. Here

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This entry was posted on Tuesday, May 23rd, 2006 at 2:42 am and is filed under Refinance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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