WHAT IS NEGATIVE AMORTIZATION? AND IS IT REALLY NEGATIVE?
Definition
Negative Amortization, or "Neg Am" is defined as a "gradual increase in mortgage debt that occurs when the monthly payment is insufficient to cover the interest due, and the balance owed keeps increasing."
What Does this Mean?
Quite simply, this means that as a result of making the minimum monthly payment on a Pay-Option-ARM loan, your mortgage balance will increase over time. This is because of the fact that the minimum payment does not cover the full interest due at the end of each month. As a result, the remainder of the interest is added to your mortgage balance.
But You Already Know This, Don't You?
As a qualified mortgage applicant, you are certainly aware of the fact that there is simply no such animal as a loan with a 1.95% interest rate on which a portion of that payment could go toward the reduction of your principal balance. This sounds too good to be true - and it is. As you might imagine, it is simply an economic impossibility, and banks would be out of business extremely quickly.
And is it really "negative?"
The very term "negative amortization" implies that it is something bad and which should be avoided. And if you watch TV, listen to the radio, read the newspaper, or surf the Web, you will undoubtedly find a variety of voices telling you that any loan with "negative amortization" is a poor loan. But how would you feel if the media referred to it by its other term - "an Optional Deferred Interest Loan?" Wouldn't that sound more appealing?
The fact is, this type of a loan is neither positive nor negative. By itself it is merely a neutral product being increasingly used by the borrowing public. If you are of the somewhat older mindset that you want a 15-year, fixed rate mortgage and are planning on paying off your loan in 10 years, then a loan with Optional Deferred Interest is probably not for you. And that is just fine.
But Make up your own mind.
Do not let anyone tell you that a loan with Optional Deferred Interest is a "bad loan." In fact, do not let any one person tell you that any one loan is inherently "good" or "bad." They are simply neutral products. Listento yourself, and work with a company that you can trust.
The Mortgage Guys of Domus Mortgage are licensed in New York, New Jersey, Connecticut and Florida. Call us at 1-800-95-DOMUS or visit us on the Web at www.domusmortgage.com for a unique mortgage experience hearkening back to the days of yesteryear when business was conducted with a handshake and a smile.
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