| What is Negative Amortization? | | | | As a Florida mortgage company we deal with a fair |
| The term "negative amortization" refers to the potential | | | | percentage of retired people for whom these loans |
| for your loan amount to increase over time - in other | | | | are simply not appropriate. |
| words, you might have reverse or "negative" | | | | The HELOC Problem |
| amortization. These loan programs allow you to pay | | | | If you have a negative amortization mortgage you |
| less that the full amount of the interest due on your | | | | may not be able to get a second mortgage or a home |
| mortgage. If you pay less than the full amount of | | | | equity line (HELOC). What’s up with this? Second |
| interest due, the difference is added to your principle | | | | mortgage and HELOC lenders base their loans on the |
| balance. A typical negative amortization loan has the | | | | amount of equity that you have in your property. Since |
| potential of growing to 125% of its original amount. | | | | your negative amortization mortgage has the potential |
| It Goes By Many Names | | | | to increase, the amount of equity that you will have in |
| Negative amortization mortgages are sold as "Option | | | | the future is uncertain. You may find that your best bet |
| ARMS", "Pay Option ARMS", "Pick-a-Pay" programs, | | | | for a second mortgage or HELOC is with the same |
| and a variety of other names. The characteristic they | | | | lender that gave you the negative amortization |
| share in common is a low payment rate, usually | | | | mortgage. |
| between 1% and 1.95%. This rate is not the true note | | | | A Lower Payment is Really Nice |
| rate; it is the rate that your payment is based on. The | | | | There are some attractive characteristics of negative |
| true note rate is a market rate, or "fully indexed rate", | | | | amortization mortgages. Well, one anyway. You get to |
| and may be 5% or more above the payment rate. | | | | make a lower payment. A lower payment can mean |
| A Nationwide Phenomenon | | | | many things. It can make that house that you want to |
| I’m a Florida mortgage broker and also hold | | | | buy affordable. And it can free up your cash flow for |
| mortgage broker licenses in Georgia, Massachusetts, | | | | other things. If you have a pile of high rate credit card |
| and Virginia. Florida mortgage customers have | | | | debt you might make a very solid case that you are |
| increasingly turned to these mortgages as real estate | | | | better off making the smaller payment on your |
| values have increased over recent years. This | | | | mortgage and channeling your savings towards paying |
| phenomenon, of course, is not limited to Florida. As | | | | down your credit cards. |
| home values nationwide have increased, borrowers | | | | Keep an Eye on Your Monthly Bill |
| have struggled to find ways to afford homes that | | | | You would be well advised to keep an eye on your |
| once cost half as much. | | | | monthly bill which will tell you how much negative |
| Look at Your Real Cost | | | | amortization is accruing. Make sure that you don’t |
| And please don’t assume that you are saving | | | | drift into a state of denial. When you are ready to sell |
| money. Without a doubt you are going to enjoy your | | | | your home your proceeds will be reduced by the |
| tiny payment (as long as it lasts), but make sure that | | | | fattened balance of your mortgage. Florida mortgage |
| you take a good look at the fully indexed rate. This is | | | | customers, like those in other states have seen |
| your real cost. Compare the fully indexed rate with the | | | | property values soften in the last year. Be aware that |
| rate on a good old fashioned 30 year fixed rate | | | | your equity could be effected by the market as well. |
| mortgage. You might find that the real cost of your | | | | When the Party’s Over |
| super low payment negative amortization loan is quite | | | | Normally your minimum payment will increase a small |
| a bit higher than the fixed rate option that is available. | | | | amount each year for the first five years. At the end |
| It’s Not a Fixed Rate Mortgage | | | | of the five years you loan will be recast. This means |
| We often get calls from customers that have been | | | | that your loan will be amortized over the remaining |
| approached by other mortgage brokers offering these | | | | term of the loan – normally 25 years. Make sure |
| products. And it never ceases to amaze me how | | | | that you are prepared for the potential payment |
| many of these callers believe that these are fixed rate | | | | change. It doesn’t hurt to ask your mortgage |
| mortgages. At one percent! Occasionally the caller will | | | | broker to calculate the worse case scenario for you. |
| be furious at me for dashing their hopes. If you are | | | | It’s best if you know the potential. |
| considering a negative amortization mortgage please | | | | Copyright © 2007 James W. Kemish. All Content. All |
| make sure that you understand what you are getting. | | | | Rights Reserved. |