|
|
|
|
Home / Finance / Mortgage
Home Loans and Negative Amortization
By:Dan Lewis
Owning a home is undoubtedly the American Dream and the bedrock of middle class. Negative amortization, however, can turn the dream into a nightmare if you are not careful.
Home Loans and Negative Amortization
When you apply for a basic home loan, you obviously must repay the loan to the lender. The repayment of the loan is typically set over a certain time period with a certain amount being paid monthly. This process is known as the amortization repayment schedule. In some instances, however, the repayment schedule can be designed to have a very problematic result.
Home loan lenders have to compete for your business. To make themselves stand out, they will come up with unique mortgage packages that make it easy for you to get into a home that perhaps is a bit beyond your means. One of the techniques for doing this is a strategy known as graduated repayment. With graduated repayments, you initial loan repayments are for less than the total interest owed on the loan. The excess interest than accumulates and is usually converted into principal.
Known as negative amortization, this process can be very risky because it is based on a bet. When you pursue a negative amortization loan, you are betting the equity in the property is going to rise faster than accumulating interest. If the equity gain doesn’t increase, you eventually have a problem where you are making payments on a home with no equity. When the amount owed on the mortgage exceeds the equity in the home, you are suddenly upside down on the loan, to wit, the home has become a pure debt.
Obviously, a lender isn’t just going to sit and let the principal on a loan accumulate forever. To avoid this, the loan will typically carry a debt cap at which point the loan automatically converts to a different loan where you start paying the balance off or the loan may just come due. For example, the loan may contain language that if the total debt exceeds 115 percent of the value of the home, the loan will convert or be due in total. Either case is a nightmare because you will either suddenly have payments you can’t make or have to come up with a bundle of cash. For most homeowners, this leads to default.
Negative amortization loans can look very attractive when you are trying to squeeze into a home just beyond your means. Just make sure they don’t kill you in the long run.
Article Source: http://www.dailynewarticles.com
Dan Lewis is with Great Western Mortgage - San Diego Mortgage Brokers - providing San Diego home loans. Great Western Mortgage is a San Diego mortgage company writing San Diego mortgages and San Diego refinance and home equity loan.
More Articles from Mortgage Category:
What Does A Home Mortgage Broker Do?
Good Things and Bad Things About ARM Loans
Home Loans and Mortgages
When To Refinance Your Home
Re-Financing with a Line of Credit Loan
Learning about Re-Financing Online
Re-Financing with Bad Credit
3 Steps Before You Consider Re-Financing
Comparison Shopping When Re-Financing
Different Refinance Strategies
Learn The Knowledge Here is Property Business Know-How
Money & Time Saving Tips For A Successful Move
Home Improvement Loan - Friend In Need
What Is Bad Credit Mortgage
The Complete Guide to UK Mortgages Online - Part II
|
|
