USA Real Estate

This post explains the concept of negative amortization loan or NegAm and at the end of this post you can download a free negative amortization calculator. Negative amortization takes place when the payment made for a loan is less than the interest due during that period. Since amortization means a reduction in the loan balance, a negative amortization implies that the loan balance actually increases.

Basically, with a negative amortization loan you get some breathing space in the beginning of the repayment period to pay less but the drawback is that the shortfall keeps getting added to the loan amount. So if you are planning to use NegAm as a strategy to get into that home that you otherwise may not have been able to afford – think twice. There is an element of speculation to going for a negative amortization loan. Most lenders have a 5-year limit on the NegAm period. After this the loan reverts or is recast to the full amortization schedule. Negative amortization loans are adjustable rate mortgages and the borrower can be exposed to “payment shock” wherein he has to face an unexpected rise in monthly payments. Negative amortized loans on a fixed rate are called graduated payment mortgages or GPMs.

An “option ARM” or “flexible payment ARM” is a type of negative amortization loan in which the borrower can choose from a fully-amortizing payment, an interest-only payment, or a “minimum” payment that did not cover the interest.
Negative amortization calculator (93)