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©
2002 Ruth E. Campbell. |
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Frequently Asked Questions Mortgages
- Q & A 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. |