Negative Amortization

When a person makes mortgage loan payments that do not cover the interest due, this is called negative amortization. It is ultimately an increase in the principal balance. The amount of interest that isn't paid is added to the principal, typically causing the lendee to owe more money.

Negative amortization is most typically seen in payment option adjustable rate mortgages. When negative amortization is tied to fixed-rate mortgages, it is with a feature known as graduated payment mortgages.

An adjustable-rate mortgage, or ARM, can be attractive to some home buyers as the initial monthly payments may be lower. The period of time set for these lower payments will be outlined in the mortgage documents. In order to make up the negative amortization that occurs, the monthly payments will increase at some point during the term of the mortgage. The rise in payments can be substantial, causing a hardship for the borrower.

When payments rise as part of a fixed-rate mortgage, the rise in payments is scheduled and known by the borrower. This can reduce payment shock and allow the borrower to plan for the increase in payments. With an ARM, an increase in payments is not always known.

If you have questions regarding which type of mortgage is right for you, speak with an experienced real estate agent. They can provide you with the information you need to make the best decision for you and your family. Being armed with the right information can help prevent you from making a decision which will impact your healthy financial future.

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