Negative Amortization Explained

When considering financing for the purchase of a new home or business, it is easy to get bogged down in all the details and options available. It is necessary, however, to consider all available avenues and lenders in order to assure an optimum package of financing is attained that will fit the particular need and budget. An available option that many first time homebuyers consider is a fixed loan with a clause providing for negative amortization for the early years of the loan. Loans that include this option are often referred to as graduate payment mortgages, or GPMs, and can be very useful to singles or couples just starting out that want to take advantage of investing in personal property in the present in order to build for their future, though their incomes might not be conducive for a large mortgage payment currently.

In a conventional loan, the payment a borrower makes is made up of two parts: the amount paid upon the interest of the loan and the amount that is applied to the principal. This amount toward the principal is referred to as amortization of the principal, and reduces the overall amount a borrower owes the lender. An example of amortization in action: A certain borrower’s loan from a lender is $200,000 at 5% interest. His or her mortgage payment each month of $1000 might apply $800 to the interest accrued, while $200 go towards the loan amount. This application or amortization to the principal brings the loan amount down to $198,800 after the first month. A negative amortization clause would allow the borrower to pay a much smaller payment; an amount less than the interest accrued. This can help allow buyers with smaller incomes qualify for a larger loan because they are agreeing to an option that could result in a longer and costlier payoff in the long run. Most negative amortization mortgages offer borrowers up to four payment options each month, ranging from a 30 year fixed payment, an interest only payment, to a less than the interest accrued payment. These flexible payment options are also attractive to buyers who need to have cash flow available for businesses or other sorts of investment ventures.

Borrowers should feel empowered to shop around and find the exact package that fits their needs perfectly. Lenders such as HomeRefi.com are willing to work with prospective buyers, providing them with all the information necessary to make an informed decision, making home ownership a reality.

About the Author: Jeremi McMaster is Chief Executive Officer of FreeHomeRefi.com, leading provider of home refinance solutions. For information on refinancing online, go to
www.FreeHomeRefi.com.