Negative Amortization Loan

Negative Amortization Loan - Negative Amortization Loan programs, which were once available to only the wealthiest of a banks customers due to their ability to allow borrowers to defer interest, are now being marketed to more "conventional" self employed borrowers, business owners, and beneficiaries of passive income, investment income, rental income or even substantial bonus or commission income.

When they were originally introduced, negative amortization loan programs were marketed under names such as "deferred interest mortgage" or "payment cap ARM", which very accurately reflect the nature of these "neg-am" mortgages, which are very powerful tools intended for homeowners with a certain degree of financial sophistication. While reverse mortgages are one type of negative amortization loan, the sort which have received the most press and the widest number of names are the so called "pay option" negative amortization loan program, which allows borrowers to choose each month whether or not they will defer or pay down the interest due on their mortgage.

As negative amortization loans have entered the mainstream in recent years, they have shed their "technical" sounding names and have been marketed to consumers under a nearly countless number of different monikers.

Here is a list of some of the most popular names for negative amortization loan programs, compiled by mortgage professionals from across the industry, although no opinions are expressed or implied about these loans or the companies who market them. This is just a list of names for nagative amortization loan programs:

Minimum Payment Option

Investor Loan

Minimum Payment Option ARM

GPM

Fixed Negative Amortization Loan

Graduated Payment Mortgage

OptPay ARM

1% Loan

1-1 Buydown (no negative amortization if buy down account is fully funded)

Option Payment

Scheduled Negative Amortization Loan

Fixed Rate Pick a Pay

Equity Builder

Neg-Am Loan

0.25% Option ARM

Interest Only (misnomer)

Quicken Smart Loan

Fixed Pick a Pay

Pick Your Payment

Secure Advantage

Deferred Interest Mortgage

Minimum Payment Loan

Pay Option

Negative Mortgage

1% Mortgage

Cash Flow Advantage

Cash Flow Construction Loan

Pay Option ARM

Fixed Option ARM

Power Option ARM

Flex Option

Flex Pay Option

Negative Amortization Mortgage

NegAm Home Loan

Cash Flow ARM

Flex 5

Secure Advantage

Payment Cap ARM

5 Year Fixed Pay Option

30 Year Fixed Rate Option ARM

Pick a Pay

Pick a Payment

Smart Choice

Smart 30 Mortgage

1 Month MTA

1 Month ARM

Self Employed Cash Flow Loan

Investor ARM

12 MAT Mortgage

Lower Than Interest Only

MTA Option ARM

Fixed Rate Option ARM

Fixed Pay Option

Power Fixed 30

COSI ARM

One Percent Mortgage

Payment Advantage Mortgage

Deferred Interest Home Loan

3-2-1 Buydown (no negative amortization if buy down account is fully funded)

Reverse Mortgage

Monthly Adjustable Rate Mortgage

FlexPay

2-1 Buydown (no negative amortization if buy down account is fully funded)

Flexible Payment Loan

Negative Equity Loan

5 Year Cashflow Loan

Negative Amortization Mortgage (Types) - Negative amortization mortgage loans are marketed under several different names and come in four basic varieties:

30 Year Fixed Rate Option Loan - A True Fixed Rate Mortgage with 4 different payment options each month. Minimum payment option usually only available for the first 5 or 10 years or until the loan balance exceeds the negative amortization cap.
also known as a 30 Year Fixed Rate Cash Flow Loan

Reverse Mortgage - a loan which allows retired homeowners to receive substantial cash out, in the for of an annuity, lump sum of cash, or combination of the two, without requiring the retired homeowners to make any monthly payments. Not offered by all mortgage companies, and limited to smaller loan amounts and specific property types.

Option ARM - Adjustable Rate Mortgage w/ 4 Payment Options and a rate which adjusts each month. Very popular and common loan in certain states, including California, New York, Florida and other high cost areas due to extremely low (Typically 1%) mortgage minimum payment.

Fixed Rate Option ARM - Adjustable Rate Mortgage w/ 4 Payment Options and a Fixed Rate "start", or introductory period of 3 years or 5 years, up to 7 or 10 years where the rate, payment, or both remain fixed, after which time the rate become variable.
also known as a "Hybrid" Option ARM

Negative Amortization - When mortgage payments do not cover the full amount of interest due, and the unpaid interest is added to the principal balance of the loan. Under standard amortization, the principal balance decreases with each payment.

On a Negative Amortization loan, the interest rate that the other options (Interest Only, 30 Year Fully Amortized and 15 Fully Amortized) other than the lowest payment are based off of adjusts every month depending on the index it's based off of.

Most pay option arm loans have a payment option that will usually incur negative amortization. Pay Option ARM loans usually have 3 or 4 payment options each month. The lowest payment option usually does not cover enough to cover the interest of the loan, thus resulting in negative amortization. Negative amortization is when your loan balance actually increases instead of lowering or staying the same.

The obvious drawback to negative amortization is that your principal balance increases and in a down real estate market, your loan may exceed your property value.

Most negative amortization loans will readjust after the loan amount becomes 110%-120% of the value of the property which could be as soon as three to five years in some markets which would result in much higher payments than anticipated.

Another term used for negative amortization is deferred interest. These types of mortgages generally have very low minimum payments, as well as other payment options such as an interest only payment, a 30 year amortizing payment and a 15 year amortizing payment.

Is negative amortization always a "negative" thing for the borrower? Not necessarily, it depends on the borrower and their individual situation. In many cases, the benefits of additional cash flow and lower mortgage payments far exceed the liability of deferring some of the interest. As your mortgage professional, I can advise you as to what indicators in your personal finances may point to whether negative amortization could be a benefit for you.

In a Negative Amortization loan make sure to ask about the "Recast" term. Usually will be a 5 year or 10 year. This is very crucial because you could incur payment shock at beginning of the 5th year or 10th year. Basically means that your small loan payment you have loved for the past 5 or 10 years doubles if you incurred to much negative amortization.

Many real estate investors who purchase properties for their rental incomes often use mortgages with negative amortization feature. Loans with "neg am" feature offer the lowest monthly payment options, which in turn improves landlords' cash flow situations.

If your first mortgage is geared for negative amortization it can be difficult to find a lender to provide a second mortgage.

Negative amortization, also known as deferred interest, will allow a home-owner the opportunity to use their equity for other purposes such as investing or home improvement. When a mortgage loan reaches the recast period (from 5 to 10 years depending on the lender) the property will have most likely appreciated in value naturally or through improvements.