Negative Amortization Arises When You Make Payment Less than the Interest Due
Negative amortization mainly refers to an increase in principal when the monthly payment does not cover the interest. You will just end up owing more as the accrued interest is added to the principal. Thus, it refers to the reduction of the mortgage balance over time.
The loan is usually unamortized in case of negative amortization. People usually prefer such loans as these are known to lower their monthly payments. They use the funds to finance the purchase of the home that they cannot afford. Moreover, people usually expect an income increase in the future. Thus, negative amortization is best suitable when the property prices are about to increase.
There are certain benefits that you can avail with negative amortization:-
It is a great benefit for the seasoned investors who have solid finances and good knowledge of different property types.
The borrowers with seasoned income and those with no fixed income can also use it. Additionally, less documentation is required to apply for financing.
Thus, while applying for negative amortization loan, the borrower must be aware that the buyer pays less than the full amount of interest charged to cover the mortgage cost. You need to pay a fixed monthly payment for an initial term and the period is generally a term of five years. During the first period, the difference between the actual mortgage cost and the lower monthly mortgage payment is added to the principal loan balance. When this period ends, you will start paying off all the deferred mortgage interest that may be higher or lower depending on the actual interest rate levels.
What about negative amortization calculator?
Of course, the low monthly payments can be attractive; still you need to understand the cost over time. Thus, you can calculate the monthly payments using a negative amortization calculator. Thus, you can get the full detail about your monthly cost for both the initial period and the total lifetime of negative amortization loan.
Fixed rate loans
If you have fixed rate loans, the negative amortization is the best tool to reduce the mortgage payment in early years of loan, but at the cost of raising the payment later on.
Adjustable rate mortgage
Adjustable rate mortgage that allows the negative amortization can increase the home affordability and can offer lower interest cost than other mortgages if the interest rate does not rise.