Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal. The additional interest expense is added to the loan balance.
The increased loan balance results in higher interest expense and in increasing the loan balance. Thus, the term "negative amortization" since the payments are insufficient to amortize the loan balance.
 |
The homeowner is in, effect, borrowing more money each month to cover the interest on the loan. The monthly payment is an interest-only payment. Until the loan starts to amortize, there is a principal part of the monthly payment. This helps current cash flow, but doesn't help to pay off the debt.
What's the problem with Negative Amortization?
If the loan ends without sufficient amortization, the remaining mortgage owned could be larger then the original mortgage!
The monthly payment is eventually reset to a higher payment amount allowing the loan to amortize over its remaining life.
The increase required in the monthly payment to repay the larger loan balance over a shorter period can be substantial.
If rates have increased substantially in the interim, refinancing may not be a good option.
Real estate prices may not continue to increase, especially if interest rates begin trending higher.
Being upside down, or owing more than the home is worth, because of the negative amortization, puts the homeowner in a difficult position when they need to sell the home.
 |
Possible Solutions to the Issue of Negative Amortization.
Increasing onthly payments can generally offset negative Amortization.
ARMs typically limit the amount of negative amortization to 125 percent of the original loan. If the loan balance exceeds this amount, the borrower has to start paying the excess.
Ultimately, the resolution may be to refinance the loan, with terms that provide for a timely reduction of the debt over a reasonable period. This may require extending the maturity of the loan.
How Are Borrowers Enticed with Negative Amortization Loans?.
Easier qualification standards
The ability to borrow a larger amount then the barrower would other wise qualify for based on their income.
Lower initial rates lure many borrowers
Increased cash flow during the beginning of the loan. The monthly payment doesn't have to increase because the interest rate on the ARM goes up.
Whom Does a Negative Amortization Loan make Sense for?
This type of loan makes sense for people and companies who have "dependable" seasonal or staggering incomes, for wealthier people who want more flexibility for investments, or for those who anticipate increased earnings or cash flow in the future. (Borrowers may inadvertently have negative amortizations if they make payments less than the scheduled payment under the terms of the loan contract).
 |
Words of Wisdom
For others, negative amortization is not recommended and can even be regarded as predatory or abusive, particularly on loans, which have high interest rates and fees, prepayment penalties, or other abusive features. One should think long and hard before they obtain this type of specialized financing and make sure it's really right for them.
<a href="http://www.summitcountymountainproperty.com/blog/"
target="_top"><b>Breckenridge Real Estate
Blog</b></a>
Search Breckenridge Real Estate News on Breckenridge Colorado homes with our Breckenridge Blog
For additional resources visit:
Property Management Resources
Colorado Home Loans
Send a Free Colorful Colorado Post Card
Search for Homes and Land in the Summit County MLS
For additional resources visit:
Send a Free Colorful Colorado Post Card
Denver Real Estate
Breckenridge Colorado Real Estate
Aurora Colorado Real Estate
Colorado Homes for Rent Attention Landlords and Property Management Companies.... Post a Full WEB PAGE AD and POST up to 5 PHOTOS for FREE! of your Colorado investment property on one of the best resources on the internet for Colorado investors to find good quality tenants !
Search For FREE! "Use Your Mouse to Rent Your House" tm
Articles © Copyright 2005 by RealEstateColorado.net, Inc.
Top of Page
|
