Negative amortization occurs when the amount of your mortgage payment is less than the interest due on your loan for that month. The result of a payment like this is that your loan balance actually increases rather than decreases after the payment.
You can request an amortization schedule from your loan officer in order to see this trend in black and white, often it is easier to fully comprehend what negative amortization will mean in the long run by seeing it in writing.
Keep in mind that mortgage payments have to distinct aspects: interest payments and principal payments. Interest payments pay down the interest owed on the principal while payments on principal are part of the amortization schedule (meaning the amount you owe is being reduced by the amount of the payment towards principal.
How does negative amortization occur? This occurs with adjustable rate mortgages that start with an initial payment below the amount owed (this is done purposefully at times in order to make the house more affordable at first). Another situation this can occur in is if the interest rate adjusts more frequently than the monthly payment adjusts.
Though at first these things are helpful for the buyer because it can get them into the home where they may not have been able to otherwise, it means that the amount they owe keeps increasing rather than decreasing, therefore there debt burden expands. For some this may be acceptable as part of their overall financial plan, however, it is a good idea to research this and speak to a financial professional before agreeing to a loan with negative amortization.
The-Best-Mortgage-Rate.com: Mortgages, Refinancing, Home Equity Loans.
