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When is a negative-amortization loan a good idea?

Posted by RCPAP on September 4, 2008
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When is a negative-amortization loan a good idea? Experts don’t agree on this question. Negative amortization is less likely to occur in rapidly appreciating markets. In markets where prices are stable or dropping, it is possible to end up with a loan balance that is higher than the market value of your home. Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess. Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don’t have payment caps usually don’t have negative amortization.