What is negative amortization?
Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due. When home prices are appreciating rapidly, negative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home. Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the bor
This can occur with flexible-payment loans which allow you, at times, to choose to make a payment that is lower than the monthly interest you incur. The difference in interest is then added to your loan balance. This is called negative amortization. Sometimes this increase to your loan balance can be diminished by making by weekly payments. If the value of your home does not increase, the amount of equity you have in the home decreases. However, this type of loan allows you to qualify for more home because the initial payments are substantially lower than those associated with a fixed-rate mortgage.
Video Transcript What Is Negative Amortization? This is financial adviser Patrick Munro talking about what is negative amortization. In the world of mortgages, an amortization schedule really means the period of time that it takes to retire. Or the French word, mort means to die. Really to put away and no longer is the debt that you have. You’ve got your home paid off or your mortgage paid off. What happens though, in the new world of mortgages. If property values go down. In fact, the interest rates can continue to go up on the mortgage. In which case, the pay down reverses itself. There is more mortgage interest and your bill actually is increasing. This is called negative amortization as opposed to positive amortization. Where by, over a period of time you pay off the loan. It’s problematic. The way you solve it, is to generally refinance the mortgage. If you can or add principal payments, excess money to the schedule. Schedule payment, in order to bring it back down.
A. Negative amortization occurs when your monthly payments are not sufficient to pay all the interest due on the loan. This unpaid interest is then added to the outstanding balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.
