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what is negative amortization? |
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What is negative amortization?
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, egative 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.
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Last Updated ( Thursday, 04 September 2008 )
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