| A negative amortization loan is a loan where the | | | | negative amortization is given to this particular situation. |
| monthly payment does not decrease your loan | | | | What is the practical use of a negative amortization? |
| principal. In other words the payment being made | | | | The main purpose of this type of amortization is |
| doesn't pay back the principal on the loan. In fact the | | | | flexibility in payments. This type of amortization was |
| payment being made doesn't even cover the minimum | | | | designed with a certain type of borrower in mind. |
| monthly interest payment. As a result your home | | | | Normally this is a type of payment that is suggested |
| mortgage will increase overtime. | | | | for people without regular income, such as commission |
| How does it work? | | | | employees and business owners. The idea is that |
| Well, your monthly payment is composed by the loan | | | | people without regular income might have a down |
| amount, interest rate, and the years that the loan will | | | | month where making a full payment is not likely to |
| be paid back. Normally a mortgage payment will | | | | happen, instead of missing a payment they would |
| include sufficient money to be applied towards interest | | | | have the option to apply the minimum amount, avoid |
| and principal, in order to effectively reduce the balance | | | | missing a payment, and add the rest to the back of |
| on the loan. In a negative amortization, you don't even | | | | the loan. On the opposite side, if they have a good |
| pay enough to cover the interest being charged by the | | | | month then making a bigger payment is also possible in |
| bank. | | | | order to catch up on the negative amortization months, |
| What does negative amortization mean to you? | | | | thus allowing the borrower to pay off the principle |
| Since the payment in a negative mortgage doesn't | | | | balance. |
| even cover the minimum interest charge, the amount | | | | Keep In Mind: |
| that wasn't paid gets attached to the principal balance | | | | This type of amortization is not for every home owner, |
| (loan balance will increase with every payment). In | | | | as time goes on and more negative amortization |
| other words, every time you make a negative | | | | payments are made, the larger the amount of money |
| amortization payment it's like you're taking out another | | | | that will be owed by the borrower to catch up the |
| loan on your home. When you amortize a loan it simply | | | | loan. |
| means that you're paying it off, therefore the name | | | | |