Negative Amortization Loans A typical mortgage payment consists of two parts: the interest due to the lender each month and the principal, which is simply the original loan amount. In finance, amortization means reducing the total amount you owe the lender. So, what does it mean when amortization is negative? Continue reading to learn more about negative amortization loans and the details of setting one up in Reno or Las Vegas, NV.
What Is a Negative Amortization Loan?
With negative amortization, the total loan amount can increase. This is a type of deferred interest loan that grants you smaller monthly payments early in the term of the loan. Whenever you choose to pay beneath the monthly interest due, the unpaid amount is added to the principal. Negative amortization loans give the borrower the option to pay the entire principal and interest, only the interest, or even just a portion of the interest each month.
What Are the Advantages?
During the negative amortization period of a loan, you can take advantage of a low monthly payment during the early stages of the loan. This is true for both fixed rate and adjustable rate mortgages. When applied to adjustable rate mortgages, negative amortization can help soften the blow of a larger mortgage payment and of payment shock after an increase in the interest rate. Negative amortization mortgage loans can also be useful if you have a variable income, such as in sales, commission-based, or freelance positions.
What Are the Disadvantages?
The downside of negative amortization is the increased payments later in the life of the mortgage. As you defer more and more monthly interest payments over longer periods of time, the more you’ll need to pay each month to fully pay off the loan later. This means that if you don’t make any payments on the actual principal of the loan, your loan balance will eventually become more than what you owed at the time of the loan’s initiation. Want to hear more about this loan type and how it may benefit your situation? Contact us today to speak with our team. 