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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 balance due. Negative amortization can be avoided by paying the additional interest owed monthly.
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. Most “ARM” loan programs have a limit on the amount of negative amortization allowed, usually no more than 110% to 125% of the original loan balance.
“Negative Amortization can be avoided by paying the additional interest owed monthly”
“Being informed is the ONLY way for you to determine which loan is best for you”
ARM loans that allow "Neg Am" can also increase home affordability and may even lower the cost of interest paid over other types of mortgages, provided that interest rates don’t persistently rise.
As with most any financial transaction, benefits often come with a level of risk. Being informed is the only way for you to determine which loan is best for you.
But when utilized properly and responsibly, a negative amortization loan can be a valuable tool in helping you better manage your monthly cash flow.
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