Negative Amortization Loans
The news is full of information and alarm regarding the trendy
neg am loan. This is a loan with negative amortization
which means the optional minimum monthly payment is low enough
that is does not cover the accrued monthly interest in the
payment. The payment rate and interest rate are not the
same in this type of real estate loan and is often called the
option arm or a power arm. These loans are designed
for a very low payment for a set period of time as short as one
month and as long as ten years. After this time
period the loan becomes a traditional arm and will adjust with
the market. The amount of the interest that was not paid
in the beginning of the loan will be added to the original loan
amount and the loan re-amortized so eventually the loan can be
paid off.
These neg am loans are not for everyone and the borrower must
have a very clear understanding of the implication of negative
amortization. However, in the right circumstances these
are fabulous loans that may give borrowers opportunities not
otherwise available to them. A borrower with a neg am
loan must have a long term plan for this short term loan
scenario.
