The Positives and Negatives of Negative Amortization Loans

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When you first hear the words “negative amortization” you might think it’s something actually, well… negative… in a bad sense.

Not really.

Negative amortization is when you have a mortgage on a home and the required monthly payment you have to make is actually less than what is needed to cover the interest. Principal? Doesn’t even start paying off it.

In other words, when you make a payment, the principal loan amount goes up! This is due to the added interest. Thus, you’re going to be getting increased payments and a raised principal loan amount.

What ends up happening with a negative amortization loan is that the monthly payment begins to be adjusted upwards to repay:

1.The interest that hasn’t been paid yet
2.The interest currently due
3.The amount which is necessary to amortize the principal balance over what’s remaning of the life of the loan

The advantages of negative amortization loans

There’s a lower initial income required to qualify. It’s sometimes the best, if not the only, option for those who have little to contribute for a monthly payment. If you expect your income to grow significantly in the near future, then you’ll have no problem keeping up with the bigger payments. It’s also used many times by real estate investors that don’t plan on holding on to the property for that long. In this case, they won’t be affected by the boosted loan value. They keep their overhead low with the reduced monthly payments of a negative amortization loan and can still sell the home later for a profit on a flip.

The disadvantages of negative amortization loans

When living in a home for several years on a negative amortization loan, it is sometimes the case that the loan amount has grown to more than what they can actually sell the house for. So when they sell the house, they might actually end up owing money to the bank!

Get your facts together before jumping into a loan

What helps you to avoid pitfalls is knowledge and getting your facts together before choosing a loan. Get yourself a knowledge mortgage broker with your best interests in mind. While in general I don’t recommend Negative Amortization Loans, it’s best to meet with a team of real estate professionals to assess the right solution for you.

Michael Emilio

Real Estate and Small Business Blog