Negative Amortization - Q & A 
Back    Next


Q: What is negative amortization?
A: 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 borrower has to start paying off the excess.



Q: When is a negative-amortization loan a good idea?
A: Experts don't agree on this question. Negative amortization is less likely to occur in rapidly appreciating markets. In markets where prices are stable or dropping, it is possible to end up with a loan balance that is higher than the market value of your 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 borrower has to start paying off the excess.

Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative amortization.



Q: Can I convert a negative-amortization loan to a regular loan?
A: Loan terms vary and each agreement needs to be reviewed carefully. Talk to your lender about specific situations.

Negative amortization occurs when monthly payments on a loan are not enough to pay the interest accruing on the principal balance. The unpaid interest is added to the principal due.

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 borrower has to start paying off the excess.

Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative amortization.



Copyright 1999 Inman News Features



freered.gif (2050 bytes)
FREE HOME SEARCH SERVICE

Use this form to order a list of homes that meet your criteria. Please give as much detail as possible.

palms

Orlando Real Estate Agent John HambrickOrlando Realtor Angela Chapman
Orlando Real Estate Professionals


407-207-5550


Seminole County|Orange County|Lake County|Osceola County|Volusia County|Polk County|Brevard County

Capital Realty Group Florida
138 E Colonial Dr.
Orlando, FL 32801
contact by E-Mail

407-207-5550

Communities|For Buyers|For Sellers|Schools|Retirement|About Us|Home Advice|Sell Tips|Golf Club Communities|Brevard County| Site Map
Copyright © 2010 John & Vicki Hambrick