Frequently Asked Questions
"What is Negative Amortization?"
Negative Amortization is the increase in a principal loan balance by making monthly payments that fail to cover the interest due. The remaining amount of interest owed is then added to the loan balance. This results in the borrower owing more money on their loan.
With new guidelines and regulations, Negative Amortization loans are virtually extinct. Just the sound of the term negative amortization makes many people cringe and it should. It’s not because a loan with a negative amortization feature (Neg Am) is inherently bad, but rather because many borrowers simply do not understand the feature. Because of the negative connotation of this term, we believe the industry is in the process of renaming this type of loan. Nowadays, this type of loan is frequently referred to as a “Payment Option ARM” or a “Graduated Payment Mortgage”. While much more pleasing to our ears, it remains the same loan and that’s fine, as long as the borrower understands how it works.
These loans became popular in the late 70’s and early 80’s when interest rates in general and mortgage rates specifically were at or near all-time highs. They provided borrowers the ability to qualify for mortgages using “start rates” or “teaser rates” which were slightly below traditional market rates. These below market rates reduced the borrower’s monthly payment obligation which ultimately allowed borrowers to qualify for larger loan amounts.