Negative Amortization Morgage - What Are The Benefits of Neg-Am Morgages?
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For example, if you had a loan amount of $200,000 with an interest rate of 6% and a term of 30 years your 'Fully Amortized' payment would be $1,199.10 per month. This positively amortized payment would pay $1,000 to interest and $199.10 to principal (while each month the amount made to principal would increase and the amount paid to interest would decrease).
However, in a Negative Amortization Morgage the required monthly payment on such a loan might only be $643.28 (which is what the payment would be if your 'Neg Am Start Rate' were 1%). In this case you would not be paying any money into the principal. In addition, the required payment of $643.28 would also not be sufficient to cover the amount of interest that is actually due under the terms of your agreement (which would be $1,000). In fact, if you subtract the required payment of $643.28 from the total interest due of $1,000 then you are left with $356.72---and that amount would be added to the total balance of your loan. Or rather, your loan balance would negatively amortize by $356.72. This means that your loan amount would then increase from $200,000 to $200,356.72
The total effect of a 'Neg Am Morgage' is that you are able to make very low payments because the payments are, in effect, subsidized by the equity in your home.
Negative Amortization Morgages come in a variety of forms though they all have several things in common. For example, all 'Neg Am Morgages' have what is referred to as a Morgage Recast. The 'recast' sets a limit on the amount you can negatively amortize a loan. For example, if your loan amount was $100,000 and your Morgage Recast was 125% then you could negatively amortize your loan until the balance was $125,000 (125% x $100,000 = $125,000). At that point you would have to begin paying the full amount of interest and principal that is due in order to pay off your loan by the end of your term. The recast is typically 115% though some lenders permit it to be as high as 125%. You should also note that most Neg Am Loans also have a Periodic Recast. This period is usually 5 to 10 years and after this point---even if you haven't reached your Morgage Recast---you must begin paying all interest and principal due on your loan.
These types of loans typically have what is referred to as a 'Start Rate'. This is a rate of interest that is below the interest rate your amortization is based on and it serves the purpose of establishing your 'Minimum Payment'. For example, your interest rate might be 7.5% but your minimum payment might be based off a 'Start Rate' of 1% (paying the minimum payment is what causes the loan to negatively amortize).
Most Negative Amortization Morgages have 4 payment options which offers you considerable payment flexibility. The options are as follows:
1. Minimum Payment
2. Interest Only Payment
3. 30 Year Payment
4. 15 Year Payment
Neg-AM morgages today come in a variety of terms: they can be fixed rate loans with terms of 30 or 40 years and they can also be Adjustable Rate Loans with with fixed periods of 5 or 10 years. The most common are ARMs that have no fixed rate period at all and fluctuate on a monthly basis in relation to an Index and a Margin.
"To say that I appreciate you and your company's help would be a huge understatement..."
Negative Amortization Morgage: The Pros & Cons
Negative Amortization occurs when your required monthly morgage payment is less than the amount that would be due if you were to pay the full amount of interest and principal due based on the terms of your loan.For example, if you had a loan amount of $200,000 with an interest rate of 6% and a term of 30 years your 'Fully Amortized' payment would be $1,199.10 per month. This positively amortized payment would pay $1,000 to interest and $199.10 to principal (while each month the amount made to principal would increase and the amount paid to interest would decrease).
However, in a Negative Amortization Morgage the required monthly payment on such a loan might only be $643.28 (which is what the payment would be if your 'Neg Am Start Rate' were 1%). In this case you would not be paying any money into the principal. In addition, the required payment of $643.28 would also not be sufficient to cover the amount of interest that is actually due under the terms of your agreement (which would be $1,000). In fact, if you subtract the required payment of $643.28 from the total interest due of $1,000 then you are left with $356.72---and that amount would be added to the total balance of your loan. Or rather, your loan balance would negatively amortize by $356.72. This means that your loan amount would then increase from $200,000 to $200,356.72
The total effect of a 'Neg Am Morgage' is that you are able to make very low payments because the payments are, in effect, subsidized by the equity in your home.
Negative Amortization Morgages come in a variety of forms though they all have several things in common. For example, all 'Neg Am Morgages' have what is referred to as a Morgage Recast. The 'recast' sets a limit on the amount you can negatively amortize a loan. For example, if your loan amount was $100,000 and your Morgage Recast was 125% then you could negatively amortize your loan until the balance was $125,000 (125% x $100,000 = $125,000). At that point you would have to begin paying the full amount of interest and principal that is due in order to pay off your loan by the end of your term. The recast is typically 115% though some lenders permit it to be as high as 125%. You should also note that most Neg Am Loans also have a Periodic Recast. This period is usually 5 to 10 years and after this point---even if you haven't reached your Morgage Recast---you must begin paying all interest and principal due on your loan.
These types of loans typically have what is referred to as a 'Start Rate'. This is a rate of interest that is below the interest rate your amortization is based on and it serves the purpose of establishing your 'Minimum Payment'. For example, your interest rate might be 7.5% but your minimum payment might be based off a 'Start Rate' of 1% (paying the minimum payment is what causes the loan to negatively amortize).
Most Negative Amortization Morgages have 4 payment options which offers you considerable payment flexibility. The options are as follows:
1. Minimum Payment
2. Interest Only Payment
3. 30 Year Payment
4. 15 Year Payment
Neg-AM morgages today come in a variety of terms: they can be fixed rate loans with terms of 30 or 40 years and they can also be Adjustable Rate Loans with with fixed periods of 5 or 10 years. The most common are ARMs that have no fixed rate period at all and fluctuate on a monthly basis in relation to an Index and a Margin.