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
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