Contact Us

    [recaptcha]
    • Home
    • Products
      • Subprime
    • Guidelines
    • Rates
    • Lenders
    • Blog

    Non Qualified Mortgage

    Non Qualified Mortgage Rates, Guidelines, Lenders and Information

    Understanding How Negative Amortization Works in Mortgages

    September 6, 2017 By Justin

    Meeting

    Absent a uniform definition, nonqualified mortgages are what lenders packaged them to be. There’s Angel Oak with its more than $1 billion in non-QM originations projected this year and Lima One that makes loans to experienced property flippers. Their loans may or may not have a feature called negative amortization, which can be a loan product in itself.

    What is negative amortization? How does it work in the context of mortgages? Is it all-risk, no-gain feature or product? Let’s understand what happens in a negatively amortizing loan.

    Let’s help you find a lender, too.

    What Is Negative Amortization

    In its guidelines about Qualified Mortgages (QM), the Consumer Financial Protection Bureau enumerated certain risky features that should be excluded from QM loans. Negative amortization is one, together with interest-only period and balloon payments.

    Negative amortization occurs when you make a monthly payment that is less than the interest owed and this deficiency is added to the outstanding balance of the loan.

    In the ordinary course of things, the monthly loan payment goes to the interest and the principal of the mortgage. This is called amortization and is meant to reduce the balance of the loan as the mortgage term runs its course and gets paid off.

    Minimum Payments, Balloon Payments

    There are loans, however, that only require minimum payments. This minimum payment can be interest-free and only covers the principal. The unpaid interest is then added to the unpaid principal, thus increasing the outstanding amount owed to the lender.

    This mechanism is somewhat true with interest-only loans if only that minimum payments cover the interest portion of the mortgage during a certain period. During this period, the principal remains unchanged.

    At the end of the interest-only period, e.g. 10 years, the loan will have to amortize over the remaining term. This is where larger-than-usual payments come in or balloon payments, prompting homeowners to refinance the loan.

    Shop and compare mortgage deals here.

    Balloon loans are structured that way, only that after the lower-than-usual monthly payments, a one-time, larger-than-usual monthly payment is required to pay off the loan.

    Any Benefits of Negative Amortization?

    In fairness, negative amortization keeps the costs of mortgages lower at the onset of the loan. This enables people with irregular income or those expecting a raise to afford a mortgage because of the lower payments. Savings on mortgage payments can be set aside for investments and living expenses.

    The situation however becomes difficult when the period requiring minimum payments or interest-only payments is over. The borrower may not afford to make higher payments to amortize the loan or the one-time big-time payment for that matter, and the number of years left to make such payments aggravates the situation.

    There is also the danger of having little or no equity to refinance which prevents homeowners from lowering their rate or reducing their payment when the loan reverts to a fully amortizing one.

    As with any financial product, it’s best to understand how the loan works before signing up.

    Negative amortization loans, interest-only loans and even balloon loans have their own perks especially if we are talking about savings early on in the loan. But you should also consider and have options ready when payments on such loans increase.

    Click to See the Latest Mortgage Rates»

    Filed Under: Lending Guidelines Tagged With: amortization, amortizing payments, balloon payments, minimum payments, negative amortization, negative amortization loans, negatively amortized loans

    Our Experts Seen On:

    More Non Qualified Mortgage Info

    • How the Length of Your Credit History Affects Your Credit Score
    • Best Mortgages for Purchasing Rental Properties
    • What to Look For When Comparing Mortgage Lenders
    • Follow These Tips to Avoid Costly Home Renovation Mistakes
    • What Are The Biggest Challenges Facing First-time Home Buyers?

    Search

    IMPORTANT MORTGAGE DISCLOSURES:

    When inquiring about a mortgage on this site, this is not a mortgage application. Upon the completion of your inquiry, we will work hard to match you with a lender who may assist you with a mortgage application and provide mortgage product eligibility requirements for your individual situation.

    Any mortgage product that a lender may offer you will carry fees or costs including closing costs, origination points, and/or refinancing fees. In many instances, fees or costs can amount to several thousand dollars and can be due upon the origination of the mortgage credit product.

    When applying for a mortgage credit product, lenders will commonly require you to provide a valid social security number and submit to a credit check . Consumers who do not have the minimum acceptable credit required by the lender are unlikely to be approved for mortgage refinancing.

    Minimum credit ratings may vary according to lender and mortgage product. In the event that you do not qualify for a credit rating based on the required minimum credit rating, a lender may or may not introduce you to a credit counseling service or credit improvement company who may or may not be able to assist you with improving your credit for a fee.

    Copyright © Mortgage.info is not a government agency or a lender. Not affiliated with HUD, FHA, VA, FNMA or GNMA. We work hard to match you with local lenders for the mortgage you inquire about. This is not an offer to lend and we are not affiliated with your current mortgage servicer.

    Contact Us | Terms of Use | Privacy Policy | Media | DMCA Policy | Anti-spam Policy | Unsubscribe

    Mortgage.info

    NMLS ID #1237615 | AZMB #0928735

    8123 South Interport Blvd. Suite A, Englewood, CO 80112

    CLICK TO SEE TODAY'S RATES