Negative Amortization Mortgages

Written by
Kirk Haverkamp
Read Time: 3 minutes

What is a negative amortization mortgage?

When applying for a so called negative-amortization loan the borrower should be aware that initially the buyer pays less than the full amount of interest charged to cover the cost of the mortgage.

Therefore you pay a fixed monthly payment for an initial term; this period is generally a term of five years, but may vary. During this first period the difference between the actual cost of the mortgage and the lower monthly mortgage payment is added to the principal balance of the loan. When this period of fixed mortgage payments ends you begin paying off all the deferred mortgage interest, which may be higher or lower depending on the actual interest rate levels at that time.

Negative amortization calculator

You should of course be aware that low monthly loan payments may be attractive, but you should have a look at the details to fully understand the cost over time. One helpful tool for understanding the cost over time is to calculate your monthly payments using a negative amortization calculator, where you can get a good indication of your monthly cost for both the initial period and the total lifetime of the negative amortization loan.

This type of mortgage product has been on the market for some time, and the need for it is legitimate. However, simply due to the complexity of it one should make sure that one understands it properly. The focus on low interest rates has to some extent been replaced by a focus on products, negative amortization loans and interest only mortgages that result in low monthly mortgage payments. Consumers looking into this type of loan product need to estimate and analyse the benefits and risks, which may not always be the simplest task.

When to look for a negative amortization loan.

The typical borrower that might consider a negative amortization mortgage is a short-term borrower, who probably considers it likely that he or she will refinance or sell the home within a period of a few years.

A typical consumer group that comes to mind is young professionals, maybe with a lifestyle and professional situation that may require relocation in the next few years. Given such a situation, to lock the mortgage in a longer period fixed rate mortgage may not pay off.

For these people, it typically doesn't pay off to spend more to lock in a longer-term fixed-rate loan. Because fixed-rate mortgages tend to pile most of the interest charged into the first few years of the loan, there is relatively lower risk for a short-term borrower in choosing short-term hybrid ARM or interest-only loan that offers lower fixed monthly payments in the first few years in return for fluctuating rates down the road.

Why are negative amortization mortgage more common now?

One of the reasons that these types of more complex loans are increasingly common on the market is that lenders have better data, support and technical tools for estimating risks as well as better credit scoring data available. Therefore lenders today can handle more loan types, e.g. negative amortization loan, no interest mortgages and piggy back loans.

Resources related to negative amortization loans

Have a look at our articles, resources, glossary or rates if you find a need for clarification or information regarding any of these types of mortgages.

More resources regarding negative amortization mortgages - calculators, rates and free quotes

If you have decided on your mortgage loan needs, start comparing rates and costs online as well as using the available calculators. Do research and compile quotes for comparison or use the service here providing up to four different quotes for negative amortization quotes. You can also contact lenders, local and national, offering the lowest cost loans and analyse the terms. You find an extensive directory of lenders and brokers with an local presence under our listing of brokers and lenders.

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