 Sam
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 Posted: Sat Apr 03, 2004 3:20 am Post subject: Negative Amortization |
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Negative Amortization implies an increase in mortgage debt when monthly payments on a loan are insufficient to pay off the interest accruing on the principal balance. The shortfall is added to the remaining unpaid balance to create negative amortization.
For example, the monthly payment on a 30-year fixed rate mortgage loan of $1,00,000 at 7% is about $700. According to the amortization schedule, the interest due and the principal for the first month are $600 and $100 respectively.
The monthly payment of $700 is "fully amortizing". That is, the interest rate does not change and the loan will be paid off within the specified term. The monthly payment of $650 would be "partially amortizing", leaving the balance to be paid at the end of the loan term. But since it covers the interest, it is regarded as no amortization.
Now, if your monthly payment is $550, the interest falls short of $50 and the loan balance would rise to $1,00,050. And this rise in loan balance is called "Negative Amortization".
The positive aspect of negative amortization is that it reduces the monthly mortgage payment at the beginning of the loan period. For instance it reduces a large increase in payment in an ARM due to increase in the ARM rate.
But the negative aspect is that payments need to be increased to amortize the huge loan amount over its remaining period.
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