Negative Amortization - Occurs when your monthly mortgage payments submitted are not sufficient to pay all interest and principal due on the loan. The unpaid interest is added to the unpaid balance of the mortgage. It could be considered borrowing equity from yourself. The period of time the neg-am is applicable is usually limited on each mortgage.

Neg-am or Negative amortization loan usually have a recast period to the loan conditions. Make sure that the recast period is 5 year or more. This will give you enough time to refinance if you are still in the loan. Contact a Mortgage Professional in regards to which lenders have a recast past 5 years.

When doing financing that has a potential for negative amoritization make sure you fully understand and feel comfortable with what that means to your individual situation. Your Loan Officer can go over the risk and benefits of the program you choose.

When used properly, mortgage loans with potential negative amortization characteristics can be beneficial to homebuyers who want to pay as little in monthly payments as possible in the first few years of the loan term.

Negative amortization When a borrower's monthly payment is too small to cover both the principal and interest of a loan. In this case, the unpaid interest is added to the outstanding balance of the loan. The danger of negative amortization is that it gradually increases the mortgage debt, and therefore the home buyer can end up owing more than the original amount of the loan.

An example of a mortgage loan that has negative amortization feature is the popular Option ARM. Option ARM gives the homeowner four options to make payments every month; (1) payment based on 30 years amortization, (2)based on 15 years amortization, (3)pay only the interests accrued for the month, or (4) minimum payment. The minimum payment option allows the home owner to pay less than the interests owed for the month. The difference of the interests owed and the minimum payment is added to the loan balance, thereby making the loan balance bigger than the month prior, and creats a negative amortization situation.

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