Most Property Owners are conditioned to believe that a Negative Amortization Mortgage is a Bad thing. Before you get that next mortgage shouldn't you get the facts so you can decide for yourself what is best. The First Question many people have is what is a negative Amortization Mortgage. A Negative Amortization mortgage is an Adjustable Rate Mortgage with predictable payments over the life of the mortgage. On an Adjustable rate mortgage you can have interest rate caps and/ or payment caps. A Payment Cap says your payment can never increase by some cap usually every year. So if you have a $500 Month Payment on an Adjustable Rate Mortgage with a payment cap of 7.5 Percent per year your monthly payment cannot be higher then 537.50 the following year. Now if your interest rate were to rise enough to force the needed payment to be $540.00 a month you would be in a negative Amortization situation. The Additional $2.50 a month would be added to your principle. You can think of a Negative Amortization as an automatic loan from your bank. Every month when you get your statement from the bank you will see at least your payment options. Option 1 is the Minimum payment. If option 1 would force a negative Amortization you will also see an Option 2 which would be the interest only payment. You may also see an Option 3 which would be the payment needed to pay off your loan in 30 Years. Some banks will give you additional options like 15 Year pay outs. The Downside of a Negative Amortization Mortgage is that in areas where real estate values don't rise or even fall you could end up owing the bank more then your home is worth if you only make the Minimum payment each and every month. The Pros of a Negative Amortization is that is very easy to create a annual budget since you know that your mortgage payment will never exceed the payment cap. The flexibility to pay more is should you be able to is also a nice plus Another Pro of a Negative Amortization Mortgage is that it offers very low introductory rates with payments fixed for the first 5 or 10 years. This means anyone can buy a home and know that for the next 5 or even 10 years their monthly payment will be the same. Here is an Example of 2 different Loans. A Negative ARM loan with a fixed payment for 5 years based on an interest rate of 1.95 Percent or a 30 year Fixed Rate of 5.5 Percent, A 250,000 Loan at 5.5 percent would run about $1420.00. A 380,000 Loan at 1.95 percent would run about $1395.00 a month. For $25 a Month lower payment you are controlling $130,000 more property. That extra $130,000 would grow by $35,000 in the first 5 year at a modest 5% appreciation Rate ($52,000 at 7 Percent, $79,000 at 10 Percent) At the end of 30 Years at 5 Percent that $130,000 would grow to over $560,000. (Over $989,000 at 7 Percent, Over 2.2 Million Dollars at 10 Percent) When one considers the payment flexibility, the low starting introductory rates, a Negative Amortization Mortgage will allow most homeowners to control more real estate for the same or less money. The Negative Amortization Mortgage is certainly something to be considered by most homeowners or prospective homeowners. |
