What is a Neg Am Loan?
A negative amortization or Neg Am loan is a type of loan that is usually used in the purchase of real estate and may be helpful to first time buyers who can’t afford huge upfront mortgage payments. In a Neg Am loan, initial payments do not even cover the full cost of interest accrued on the loan. The remaining unpaid interest is added to the money owed on the house, so the loan increases in size. While this may be attractive to buyers at first, Neg Am loans only allow below interest rate payments for a short period of time, and eventually, payments must increase to cover the full cost of interest, which is now higher than it would have been in the onset since the total amount owed is higher. When a real estate market is hot or booming, some people choose to get a Neg Am loan since there is a good likelihood that the value of their house will quickly increase, and they can thus refinance for lower payments similar to their initial house payments. There is, of course, no guarantee that t
In the pas , home buyers scrambled to get into as much home as they could afford in some of the hot real estate areas, just to participate in the heady 20-30% gains. To maximize their investment dollars, they took on negative amortization loans and kept buying. Now that the real estate market has, ‘ahem’ softened, the media (and maybe soon the government) is all over loan companies for their use of these loan products. But for better or worse, there is power in neg am loans and you should know whether this type of loan is for you. Your loan amount usually consists of principle (the amount being deducted from the amount you owe) and interest. The mortgage industry has already given people the ability to forego paying principle by interest-only loans. But now you can even forego the need to pay all the interest you owe every month with a neg-am loan. You’ll pay less every month, and the interest you don’t pay gets tacked on to the amount you owe. For example, the monthly mortgage payment
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