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Negative Amortization Mortgages

This essay describes negative amortization mortgages outlining the principal characteristics of this type of amortization plan.

Negative amortization (NegAm), is a status of mortgage whereby the repayment amount for a given loan period is lower than the interest charged upon the mortgage loan resulting in the actual balance increasing. Negative mortgage amortization is also known as a Graduated Payment Mortgage (GPM), when the interest amount charged against a mortgage loan exceeds the amount that contributes towards decreasing the mortgage principal.

Features of Negative Amortization Mortgages

  • The payment for a given period does not cover the interest charged for that loan period so the mortgage balance increases.
  • Recast period – Usually a five year period.
  • Recast principal – Up to a 25% increase of the amortized mortgage balance above the original mortgage amount.

  • Negative mortgage amortization loans are advertised with artificial introductory interest rates or with the minimum monthly mortgage payment shown as a %age of the mortgage loan amount.
  • Potential for “payment shock”. Negative amortization mortgage payments can jump erratically from one month to another, sometimes to disastrous effect for the borrower.

Differences Between Negative Mortgage Amortization and Reverse Mortgages

Negative amortization mortgages show an increase in the principal in the early part of the mortgage term… hence negative amortization: the amount owed increases rather than decreases. Reverse mortgages occur when a borrower sells the equity in his/her property but retains permission to reside there. Repayments are not due until the owner moves from the property but the interest charged on the mortgage is put back onto the principal as no interest payments are made during the term of the mortgage loan.

Negative Mortgage Amortization Summary

You should be very familiar with how this type of mortgage amortization works before entering into it: it is extremely important to understand how negative amortization payments change when the amortization period begins. Well planned negative amortization mortgages schedules or tables are a must.