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What is Negative Amortization?
By Francisco Perez of iblogzone
Negative amortization happens when a loan payment schedule has increasing amounts each year because the scheduled monthly payments do not fully cover the amount of interest due. The unpaid interest builds up and is then added to the principal of the loan, resulting in you owing more on the loan balance each year instead of chipping away at the principal balance. Graduated payment loans allow you to buy a home with a larger loan and a smaller payment up front. However, the payments go up at pre-determined times throughout the loan, and keep accelerating into larger payments toward the end of the loan life to catch up for the earlier lower payments. During this time, especially the early years, they are building up negative amortization, thus you are owing more each year on your loan balance than you started with. Option ARM loans have become popular during the boom, as they allow you to buy a home with a large loan, yet pick which payment you want to send in monthly. In good times, you may choose the lowest payment, which would accrue negative amortization. In good times, you may want to bump it up to an interest only or even a fully amortized payment. These loans may be beneficial to someone starting out in a career that needs a lower loan payment option, but as you progress in life you can pay the higher amount, thus combating or making up for the early negative amortization.
This intel first appeared on: http://real-estate-dot.com/2008/11/negative-amortization-what-is-it...
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This intel was contributed by diTesco
diTesco
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May, 2012
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