February 28, 2019
What is Negative Amortization?
From time to time a client will enter into a loan that is characterized by negative amortization. This is a mortgage loan in which the loan’s principal continues to increase over time because the contractually-permissible regular payment falls below the amount of interest charged on a monthly basis. In other words, where the monthly interest on a loan is $400, but the permissible payment is $350, the $50 not paid is added to the principal balance due on the loan. Therefore, as the principal increases, so does the interest due on the loan over time.
There are special negative amortizations in which this latter portion does not hold true—most particularly in the case of reverse mortgages, which are heavily regulated under federal law to restrict potential borrowers to an older age group and which are based on established equity in a home. But for the most part, the principal will build, and will eventually either become due in a final lump-sum payment (as in a balloon loan), or in a scaled set of higher payments later in the loan’s established lifetime.
The latter sort of loans—especially when they begin as fixed-rate loans, are often referred to as graduated payment mortgages. These begin with a low payment that fails to cover the interest portion initially, for a set number of years. Following the end of this term, the monthly payments increase to cover both the interest and the now-increased principal amount.
Most negative amortization loans made these days are adjustable rate mortgages, known as payment option ARMs, that are fixed for a certain amount of time and then adjust once that time has elapsed (fixed for one month, then adjusting at the end of that month, and so forth), which offer the borrower the options of paying only the interest, paying only a portion of the interest, or paying both the principal and the interest.
Whichever sort of mortgage one takes out on a home, we at Topouzis & Associates, P.C. are experts at ferreting out and disposing with problems with a property’s title in advance of closing. We take pride in the great amount and quality of experience we bring to the closing table in Rhode Island, Massachusetts, and Florida. Contact us if you want a partner in your property closing—one who makes everyone involved feel like family.