|
From RealEstateColorado.net Resources & Links Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal. The additional interest expense is added to the loan balance.
The homeowner is in, effect, borrowing more money each month to cover the interest on the loan. The monthly payment is an interest-only payment. Until the loan starts to amortize, there isn’t a principal part of the monthly payment. This helps current cash flow, but doesn't help to pay off the debt. What's the problem with Negative Amortization? If the loan ends without sufficient amortization, the remaining mortgage owned could be larger then the original mortgage! The monthly payment is eventually reset to a higher payment amount allowing the loan to amortize over its remaining life. The increase required in the monthly payment to repay the larger loan balance over a shorter period can be substantial. If rates have increased substantially in the interim, refinancing may not be a good option. Real estate prices may not continue to increase, especially if interest rates begin trending higher. Being upside down, or owing more than the home is worth, because of the negative amortization, puts the homeowner in a difficult position when they need to sell the home.
Possible Solutions to the Issue of Negative Amortization. Increasing onthly payments can generally offset negative Amortization. ARMs typically limit the amount of negative amortization to 125 percent of the original loan. If the loan balance exceeds this amount, the borrower has to start paying the excess. Ultimately, the resolution may be to refinance the loan, with terms that provide for a timely reduction of the debt over a reasonable period. This may require extending the maturity of the loan. How Are Borrowers Enticed with Negative Amortization Loans?. Easier qualification standards The ability to borrow a larger amount then the barrower would other wise qualify for based on their income. Lower initial rates lure many borrowers Increased cash flow during the beginning of the loan. The monthly payment doesn't have to increase because the interest rate on the ARM goes up. Whom Does a Negative Amortization Loan make Sense for? This type of loan makes sense for people and companies who have "dependable" seasonal or staggering incomes, for wealthier people who want more flexibility for investments, or for those who anticipate increased earnings or cash flow in the future. (Borrowers may inadvertently have negative amortizations if they make payments less than the scheduled payment under the terms of the loan contract). Words of Wisdom For others, negative amortization is not recommended and can even be regarded as predatory or abusive, particularly on loans, which have high interest rates and fees, prepayment penalties, or other abusive features. One should think long and hard before they obtain this type of specialized financing and make sure it's really right for them. Click on the link to our Secure Loan Server for a Colorado Home Loan If you have a real estate or mortgage question and or would like immediate assistance, please email us. We can be reached at info@realestatecolorado.net One of us will respond faster then you expect. For additional resources visit: Send a Free Colorful Colorado Post Card Search for Homes and Land in the Summit County MLS Denver Real Estate Breckenridge Colorado Real Estate Boulder Colorado Real Estate Colorado Springs Real Estate Ft Collins Colorado Real Estate Aurora Colorado Real Estate Colorado Homes for Rent Attention Landlords and Property Management Companies.... Post a Full WEB PAGE AD and POST up to 5 PHOTOS for FREE! of your Colorado investment property on one of the best resources on the internet for Colorado investors to find good quality tenants ! Search For FREE! "Use Your Mouse to Rent Your House" tm Denver Real Estate Blog Find Denver CO Real Estate News Denver Colorado Homes in our Denver real estate Blog Breckenridge Real Estate Blog Search Breckenridge Real Estate News on Breckenridge Colorado homes with our Breckenridge Blog © Copyright 2004 by RealEstateColorado.net |
