Knowing Negative Amortization

As a real estate player, you have to know about the notion of negative amortization when it comes to your mortgage loan.

You may have heard this term being mentioned by savvy investors and those who know their stuff. Bankers may even attempt to sound professional by sprinkling this term all over their conversations with you.

A negative amortization mortgage loan is gaining widespread popularity. Negative amortization occurs when your payment or interest rate ceiling keeps the actual monthly installment below the level required by the current fluctuating market interest rate. Because you have not made payment of the interest charges in full, the unpaid portion of interest is then added on to your remaining principal amount outstanding in your mortgage loan. Your outstanding balance will therefor increase rather than decrease.

Depending on your mortgage loan lender or the terms stipulated in your mortgage loan, the lender may extend the tenure of your mortgage loan or make changes to your subsequent payments accordingly based on the new outstanding mortgage loan amount that is due outstanding.

Negative amortization mortgages can come into the picture in these ways:

1) Minimum-payment options. Negative amortization commonly occurs in this instance as you pay a minimum monthly payment. So even when you are supposed to pay more according to the market interest rates, you are only obliged to make the minimum payment amount as stated in the mortgage terms. This will result in negative amortization.

2) Interest only options. As you are required to make interest payments only in this type of mortgage loans, your principal neither increase or decrease.

3) 15 year and 30 year mortgages.

A savvy player is likely to take up mortgages that allow him to make only interest payments so that he makes full leverage of the mortgage instruments available to him. It allows him to have greater access to cash for other investment vehicles. However, if your appetite for risk is low, think twice before going headfirst into it.

Generally, the longer a mortgage tenure is, the lower the monthly payment will be. Most people choose to take up a longer term mortgage loan so as to put less stress on their personal financial position. However do note that the longer a mortgage loan stretches out, the more total interest you will eventually pay if you hold on to the mortgage for the full term.