| Negative amortization loans offer borrowers the flexibility of smaller monthly payments, at least initially. These kinds of loans allow the home owner to make payments that do not cover the full cost of the interest owed. As you may have guessed, the home owner will be responsible for these payments later. If you are looking at a negative amortization home loan, you should know that there are benefits and risks. Considering the following tips.
Your negative amortization mortgage balance will not decrease initially. Those small payments are not without consequence. Your monthly payments are less than the amount required to cover assessed interest expense. Your interest expense is compounded. The difference between the amount paid and the amount owed will be added to your principal balance. As a result, your mortgage balance goes up rather than down.
Those likely to enjoy the most benefit from negative amortization home loans are:
- Borrowers with very limited income – these borrowers could not get into the home with more traditional loans and monthly payments.
- Investors that don’t intend to own the property for an extended period.
- Prospective home owners buying in areas where interest rates are reasonably likely to decline.
As with any type of adjustable rate mortgage, negatively amortizing home loans are not a good option for everyone. Borrowers that should be particularly cautious are home owners who intend to sell their homes in a few years. The outstanding balance will cut into, or even erase, any anticipated profits. In fact, home owners may even find that they owe more than the home is worth.
A negative amortization calculator can help you understand the real costs and risks of this type of loan. Before you apply for and get pre-approved for a negative amortization mortgage, use a negative amortization loan calculator to determine your monthly costs and your overall payout.
Get familiar with the negative amortization loan lingo. You will be unable to make an informed loan decision without learning about the language used to describe the loan properties. Samples of the most common terms follow:
- Recast – The negatively amortizing mortgage is suspended if the balance exceeds preset limits. At this point the loan is recast as a fully amortizing mortgage (payments cover both the interest and principal) or a full interest only payment.
- Cap - The percentage of the rate change on the loan payment.
- Period – Time between adjustments on the loan.
- Payment Options – these include 30 year and interest only payments.
Lastly, a reverse mortgage is one type of negatively amortizing loan that can be particularly attractive for seniors and retirees. The loan amount is only due after the seller no longer occupies the home.
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