 Negative
amortization mortgage loan
Ask Dr. Don by
Don Taylor, Ph.D., CFA • Bankrate.com  Dear
Dr. Don,
Please explain the benefits and the disadvantages
of negative amortization mortgage loans. -- Robin Rate
 Dear
Robin,
Negative amortization means that your loan balance is increasing
instead of decreasing. With a negative amortization loan, when your monthly payment
on an ARM (adjustable-rate mortgage) isn't enough to cover the interest expense
and principal payment, the shortage is added to your loan balance. This situation
arises when the adjustable-rate mortgage has a payment cap but the interest rate
on the mortgage has increased.
What's good about negative amortization
is that your payment doesn't have to increase just because the interest rate on
your ARM went up. The lender can also price the loan more aggressively because
a payment cap doesn't mean that the lender can't pass along an interest rate increase. What's
bad about negative amortization is that the payment will eventually reset to a
level to allow the loan to amortize over its remaining life. The increase in the
monthly payment needed to repay the larger loan over a shorter time span can be
substantial. If rates have increased substantially, then refinancing may not be
a viable option. Real estate prices may not continue to increase,
especially if interest rates start trending higher. Being upside down in a mortgage
loan because of negative amortization isn't pretty if you need to sell your house. I'd
rather see homeowners in a 5/1 ARM or a 7/1 ARM than in a short-term ARM with
a payment cap that's subject to negative amortization. | 
