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Negative Amortization

Negative amortization can be a problem with adjustable rate mortgages that do not adjust quickly enough. Negative amortization simply means that the monthly payments that a lender requests do not cover the interest and principal of the home loan, which means that the overall home loan debt increases rather than decrease. Negative amortization takes because there are two parts of the mortgage payment. The interest payment covers the amount of interest that you are paying to the lender in exchange for getting the loan in the first place. The principal payment takes care of the principal amount that you are paying off -- this payment is the one that reduces your overall debt (the amount that you agreed to borrow) so that you eventually pay off your home. With negative amortization, the amount that you have agreed to pay each month is generally too little and this means that your debt grows rather than decreases with time. If you are affected by negative amortization, it is important to get a negative amortization schedule from your lender. This shows you exactly how much money your debt is increasing by and can tell you how much of a problem negative amortization is for you. With this information in hand, you can also learn how much negative amortization will cost you in the long-term. This can help you make decisions about mortgage refinancing or other options, if needed. Of course, negative amortization is not always a big problem. In some cases, a little negative amortization is fine. For example, if you are just starting out in an adjustable rate mortgage, your initial payments may be very low so that you can afford your new home. In this case, you may be affected by negative amortization for the initial few months your rate is low, but them you will begin a repayment schedule that will allow you to pay off your home. In some cases, negative amortization is necessary in the short term in order to allow you to afford a home. In the long term, this sort of negative amortization may be able to help you reach your long-term financial goals. However, it is always important to keep an eye on negative amortization to ensure that it does not cost you your home or your financial dreams.


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