A Neg Am loan is a type of loan that defers interest payments. Also called a deferred interest loan, it is a type of loan that should be thoroughly understood before even being considered. A negative amortization loan allows you to make monthly payments that add up to an amount that is less than that of the accrued interest. The amount that is not paid is then added back into the total balance of the loan. This is continued until a predetermined level or amortization cap is reached. These types of loans are also called "upside down loans" because you can end up owing more than you borrowed and more than the property is worth.

The Later Years of a Neg Am Loan

After the negative amortization cap has been reached then the payments will increase to make up for the previously deferred interest. The increase will not be unchecked, however. It is limited by a monthly payment increase cap. This cap helps to ensure that your payments do not go far beyond your ability to pay.

A neg am loan is often attractive because in the short term it allows you to pay less. However, you have to keep in mind that the monthly payments will invariably go up once the amortization cap has been reached and you will have to keep up with those higher payments.

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