How do the “neg am” adjustable rate loans work?
By far, the most popular loan in the market today seems to be the adjustable rate loan that has a low index and a low margin. These loans frequently come with a “neg am,” or negative amortization provision. Here’s how it works: ARM rates are usually arrived at by taking an “index,” which is typically a moving average of a major equity market, like the 12 Monthly Average Treasury (12 MAT) and adding it to a “margin,” which is a fixed and constant percentage over the index, that does not change during the life of the loan. As an example, let’s say the 12 MAT index for a particular month is 1.4%, and the margin on the loan is 3.00%. The fully indexed rate is the sum of the two, or 4.4%. Now, if the ARM has a low start rate (or payment rate) of 1.25%, what this means is the lender will allow the loan to be paid at the payment rate of 1.25% for the first 12 months; however, the note rate (which again, is the same as the fully indexed rate) is 4.4%. This creates a difference in the payment r
