Negative amortization


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Negative amortization

A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.

Negative Amortization

A situation in which the principal amount of a loan increases if a payment does not cover the full interest due. For example, if the interest due for a given month is $300, and the borrower pays $200, then $100 will be added to the principal. Negative amortization is used in some mortgages. This allows more people to be eligible to borrow with lower monthly payments, but negative amortization will inevitably increase the payments when it comes time to repay the principal. See also: Payment option ARM.

Negative amortization.

When your loan principal increases rather than decreases because your monthly payment isn't enough to cover the loan interest, that's called negative amortization.

This can happen if you have an adjustable-rate mortgage (ARM) that specifies a payment cap, or maximum rate increase, and the interest rate rises above the cap.

Negative amortization can also occur with mortgages that have no rate adjustment caps, or those that let you make very low initial payments that don't cover the loan interest.

The promise of low initial payments may make loans that could result in negative amortization attractive, but there are substantial risks. Eventually, your monthly payment will have to increase, sometimes sharply, to pay off the larger loan.

If interest rates have risen, you may not be able to refinance at a favorable rate. And if real estate prices fall, you could find yourself with a mortgage loan that is larger than the value of your home.

negative amortization

The situation that exists when one's monthly loan payments are insufficient to completely pay currently accrued interest.The unpaid interest is added to the principal balance. Rather than the normal situation of a principal balance becoming smaller with a fully amortizing loan, this situation results in a larger balance, hence the name negative amortization. It occurs most often when a borrower has a variable-rate loan but with fixed monthly payments for a short period of time.

Negative Amortization

A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called “deferred interest.”

See Adjustable Rate Mortgage/How the Monthly Payment on an ARM Is Determined/Negative Amortization ARMs.

References in periodicals archive ?
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Additionally, streamlined refinances are exempt from appraisal requirements as long as the loan does not have a negative amortization or interest-only terms, and the credit risk holder remains the same.
The Myerses have a negative amortization home line of credit, which has increased in the seven years they have had it.
A creditor will be able to make a "qualified residential mortgage," which provides the creditor with special protection from liability provided the loan does not have certain features, such as negative amortization.
Another option, the "qualified mortgage," would offer creditors special liability protection as long as the loan does not have certain features, including negative amortization.
The act creates further restrictions on the structuring of residential mortgages by establishing a prohibition on the use and application of prepayment penalties, negative amortization and mandatory arbitration.
The lender often fails to explain the implications of other terms such as adjustable rates, negative amortization, and balloon payments.
In the meantime, because many of these owners couldn't actually afford the negative amortization, mortgages routinely included interest reserves, what was essentially another loan to pay off the interest on their mortgage.
The loan that the Walstons took out with their house as collateral is a negative amortization loan.
Last month, the oldest and largest private insurer of home loans, Mortgage Guaranty Insurance Corporation, issued a bombshell warning that in large parts of the country, it will no longer provide coverage on cash-out refinancings, reduced-documentation loans, mortgages with down payments less than 5 percent, loans for rental houses or other non-owner-occupied investor properties, and mortgages with negative amortization features, such as payment-option loans.
High-cost loans that result in negative amortization will also be prohibited.
Negative amortization turns that on its head, causing the homeowner to pay none of the principal and only part of the interest--so that he has amassed debt, not accumulated equity--during the first few years.