Taking out a home mortgage loan is a complicated process that often involves terms and conditions that are difficult to understand. One such term is “negative amortization.” A negative amortization loan is an adjustable rate loan in which the monthly payments do not cover the interest. The result is a loan with a balance that increases over time.
You may be asking yourself, “Why would anyone want to get involved in a negative amortization loan?” This type of loan isn’t for everyone. Those people who sign up for this type of loan are usually looking for a creative way to finance more home than they can afford. The initial monthly payments for this loan are usually quite low.
If you sign up for a negative amortization loan, you need to make sure to review the terms carefully. Many people get in over their heads with this type of loan. One way to avoid this is to make larger monthly payments to cover the difference over time. If you don’t take action to get the loan under control, your loan balance will end up being higher than the actual value of your home.
Many negative amortization loans come with built-in payment caps. When your loan reaches a certain percentage over the original loan amount, usually between 110 and 125 percent, you need to start making larger payments to make up the difference. It’s important to prepare for these larger payments, as they are an eventual reality for negative amortization loans.