Home Loans
How Can Negative Amortization Affect My Mortgage?
(presented by www.refinance-refinance.net - mortgage lenders)
By Ben Afzal
Basics
A traditional mortgage in the past was a 30 year fixed loan.
This loan type offered a way to pay off your loan slowly over a 30 year time frame.
Each month part of your payment was used to pay down your loan principal. The other part of your payment was the interest earned by the lender. Over time your loan balance decreased.
Newer loans have offered borrowers many new loan options, some of which may result in negative amortization.
Interest Only Loans
An interest only loan offers a monthly payment where the borrower only pays the interest owed on the loan.
The loan size does not increase or decrease. It remains the same. As such, there is no risk of negative amortization.
Minimum Payment Option Loans
A minimum payment option loan offers the borrower the chance to make a minimum payment that is lower than an interest only payment.
For example:
- an interest only payment is $2,000 per month
- the minimum payment option is $1,500 per month
The difference between the payments here is critical. If the borrower makes the $1,500 minimum payment than the $500 difference ($2,000-$1,500) is added onto the loan. If the loan was $400,000 then after the payment the loan will now be $400,500.
Reasons For Negative Amortization
Some borrowers are comfortable with an increasing loan size because they have a lot of equity in their property, or they believe their property value will continue to rise.
For example, if a borrower has $500 worth of negative amortization each month at the end of the year their loan size will be $6,000 more. If the loan size has increased from $400,000 to $406,000 but the property is worth $500,000 the borrower may not be concerned.
e the pr
operty owner may see their equity decline or disappear. A borrower could end up “underwater” owing more on a property than it is worth.
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