Upside Down Mortgage

Negative Amortization Loan

Below are the truth about negative amortization loans and mortgages. A negative amortization loan or mortgage is one that when you take out the loan, it does not amortize. That means you do not pay down a negative amortization loan for a set period of time. If fact, with a negative amortization loan, as you pay for the loan, it gets bigger. With a normal payoff schedule for a negative amortization loan, you will never pay it off. It seems like with negative amortization loans, the more your try to pay it down, the more your owe. So, how to pay off a negative amortization loan?

Paying off negative amortization loans and mortgages

When trying to find out what you must pay monthly to pay off a negative amortization loan or mortgage, you can use the negative amortization loan calculator to help you. In California, negative amortization loans allow people to buy houses that they could not otherwise afford. Other popular negative amortization mortgages are Idaho negative amortization mortgage and Washington negative amortization mortgage. The bad news is that negative amortization loans are responsible for many foreclosures and upside down mortgages each month.

Negative amortization loan and adjustable rate mortgages

Negative amortization loans are simply adjustable rate mortgages with two rates.  The first rate of the negative amortization mortgage is the contract rate which is the interest rate used to calculate your monthly payment. The second interest rate is the fully indexed interest rate. The contract rate is often low so that you can afford the negative amortization loan but the fully indexed rate is often much higher. The fully indexed rate is the current index rate plus margin.

Negative amortization loan example

An example of a negative amortization loan is if you take out a $200,000 negative amortization mortgage with fully amortized contract rate of 3% and fully indexed rate of 5%. Then each month, your negative amortization loan balance will be calculated at 3% for your minimum monthly payments. The 5% indexed rate is calculated and offered to you as well. You can pay either amount of payment.

Negative Amortization Loan

Most people, of course, will pay the smaller amount of the two. However, the minimum payment for that negative amortization loan is actually the bigger one, calculated at the fully indexed interest rate. That means, by paying the teaser rate or the contract rate, you are not even paying the interests. So, your negative amortization loan balance gets bigger, accumulating even more interest at the indexed rate, not the contract rate.