| Negative amortization loans, also known as deferred | | | | the deferred interest can take your equity and cause |
| interest loans, neg am and payment option ARMs | | | | you to owe more than what the house is worth over |
| (adjustable rate mortgages), are home financing | | | | time. |
| options that have payment adjustment caps in addition | | | | Comptroller of the Currency John C. Dugan said |
| to interest rate adjustment caps. This means that | | | | regulators are especially concerned about negative |
| even though the loan's interest rate may increase, your | | | | amortization loans in real estate markets entering |
| payment will generally stay the same. As housing | | | | down cycles: "If real estate prices decline -- and there |
| prices skyrocketed, these loans became more popular | | | | already is evidence of softening in some markets -- |
| because they gave homebuyers more power to | | | | these borrowers could face the bleak prospect of loan |
| purchase more house for a lower initial cash outlay. | | | | balances that exceed the value of the underlying |
| The 1% start rate also makes house payments more | | | | properties." Dugan and other regulators are also |
| affordable for the first few years of the loan. | | | | worried that many people may not fully comprehend |
| How Negative Amortization Occurs | | | | the impending payment shock when the loan adjusts |
| A mortgage is largely figured by using the loan amount, | | | | to fully indexed payment. |
| the interest rate and the number of years to pay back | | | | The federal financial regulatory agencies express |
| the loan. Traditional mortgages consist of monthly | | | | concern over the fact that these low payment home |
| payments to cover interest and a gradual reduction of | | | | buying options are offered to a wider spectrum of |
| the principal (amortization). With negative amortization | | | | buyers who may may not otherwise qualify for a |
| loans there are payment caps that limit the amount of | | | | similar-size mortgage under traditional terms and |
| payment increases, but not interest-rate increases. As | | | | underwriting standards. And, institutions are increasingly |
| a result, the minimum payments do not even cover the | | | | combining these loans with other features that may |
| monthly interest. The shortfall is automatically added to | | | | compound risk ("risk layering") including reduced or no |
| your loan balance, causing the principal balance to | | | | documentation loans, and the 100% 1st mortgage, also |
| increase rather than decrease. | | | | known as a no money down home loan or 80-20 loan |
| Neg-Am and Option ARM Risks | | | | because of the typical 1st mortgage that covers 80% |
| If you make the minimum payment, in addition to the | | | | of the purchase price and simultaneous piggyback 2nd |
| unpaid interest being tacked onto the loan balance, | | | | for the 20% balance. |
| additional interest may be charged on the shortfall. So, | | | | |