Understanding Negative Amortization Loans

Negative amortization loans are type of loan that are commonly use in order to provide a more affordable payments for home buyers at the beginning of a mortgage. Negative amortization loans are loans in which the home buyer does not pay the full amount of interest and principal for each payment. The amount of interest that is not paid is then added onto the total balance of the loan. By doing this, you are essentially adding to the amount of money that is borrowed with each mortgage payment.

Risks

With a negative amortization loan, the loan is going to be recalculated at some point. For example, they might allow you to make lower payments for the first 15 years of the loan. They will then recalculate the loan payment so that the money that was borrowed will be repaid by the end of the mortgage. This means that your payment is going to jump up substantially. The big risk with this type of loan is that you will not pay enough at the beginning of the loan and your payment will then increase to an amount that you cannot afford.

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