The Problem with a Negative Amortization Mortgage

A negative amortization mortgage is a loan that many homeowners have chosen in recent years. While it may be attractive initially, this type of mortgage carries with it a few problems. Here are a few things to consider about a negative amortization mortgage.

Negative Amortization Mortgage

The negative amortization mortgage is also commonly referred to as an option-arm or neg-am. With this mortgage, the homeowner has a monthly payment that is less than the amount of interest that is owed each month. The difference between the payment and the amount that is owed is added onto the balance of the loan.

Problems

The big problem with this type of loan is that your loan balance is getting bigger every single month. Therefore, your loan can quickly get out of control if you do not start making bigger payments. In order to pay off this loan, your monthly mortgage payment is going to have to increase at some point. Many buyers that use this mortgage do not plan ahead and are therefore, unable to afford any increases in payments. This situation has caused many problems for homeowners that have used this mortgage to pay for a house. It often leads to people getting homes that they cannot afford.