Negative amortization loan calculator amortization california mortgage negative/title> <meta name="description" content="negative amortization - Within the new smart loan program by far the most popular is the minimum payment option. Minimum payment is an other term for negative amortization. Negative amortization is the capital"> <meta name="keywords" content="negative amortization, "> <link rel="stylesheet" media="screen" type="text/css" href="images/default.css" /> </head> <body id="dj"> <div id="header"> <table width="100%" height="120" border="0" cellpadding="0" cellspacing="0"> <tr> <td width="31%" style="padding:15px;"><img src="images/header_logo.gif" width="245" height="77" /></td> <td width="42%"> </td> <td width="27%"><img src="images/get_distrifusion.gif" width="222" height="56" /></td> </tr> </table> </div> <table width="100%" border="0" cellspacing="0" cellpadding="0"> <tr> <td width="15%" height="203" valign="top" align="center" bgcolor="#FEF0E6"><script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td> <td width="85%" valign="top" style="padding:10px;" bgcolor="#FEF0E6"> <div id="text"> <h2 title="negative amortization">Negative amortization</h2><br> <p>If interest were meant to be an inducement to the real estate investor to divert hard earned cash into useful endeavors, the negative amortization mortgages are an even greater inducement. Within the new smart loan program by far the most popular is the minimum payment option. Minimum payment is an other term for negative amortization.</p><p> </p> <div align="left"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </div> <p>Negative amortization is the capitalization of interest payments, accrued to principal. This is a common feature in adjustable rate mortgages. Mortgages originated in the United States are typically level paying mortgages. Upon origination a level monthly paying amortization schedule is specified, a portion of which is applied toward principal write down and the remainder applied toward interest due. Initially most of the payment is applied toward interest due and as the principal balance keeps declining and increasing portion of the payment goes toward principal amortization.</p><p> </p> <p>Amortization is the gradual repayment of a mortgage loan, but principal and interest, in installments. Amortization allows for monthly payments that are big enough to pay the interest and reduce the principal on a mortgage. Negative amortization happens when the monthly payments do not cover all of the interest cost. The interest cost that is not covered after making payments, owe more than the start of the loan. Negative amortization can occur when an adjustable rate mortgage has a payment cap that results in monthly payments not high enough to cover the interest due.</p><p> </p> <p>Do not be fooled by the word negative in negative amortization. It does not necessarily mean the whole concept is something to be avoided. Such mortgages have a lot to offer.</p><p> </p> <p>Before addressing the question of how a negative amortization mortgage works, consider how a positively amortizing loan functions.</p><p> </p> <table width="100" border="0" align="right"> <tr> <td><script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script></td> </tr> </table> <p>The conventional mortgage loan requires of the borrower monthly payments of principal and interest; these, over the term of the loan, lead to the principal amount being paid off. The process of paying off that loan is called amortization. The portion of each monthly payment that goes toward principal and interest changes with each payment made. In the early years of the loan, most of the monthly payment goes toward the interest, but at some point in the middle of the term the proportion changes so that, in the end, most of the payment goes toward the principal.</p><p> </p> <p>Payments also may be made that include, in addition to principal and interest, an extra amount that is applied to the principal and thus accelerates the reduction of the loan balance. The option has artificially low payments that the lender will accept, but these payments do not pay for all interest due nor do they pay for any of the principal. The remaining interest that was due for the month but not paid is added to the principal balance of the loan, causing the balance to increase and negative amortization to occur.</p><p> </p> <p>With numerous payment options from which to choose, there is much flexibility for the borrower. Especially appreciating this flexibility are borrowers whose income varies or whose financial situation is complicated. Usually banks and other financial institutions are prepared to accept negative amortization on the condition that the original principal does not grow beyond a predetermined ceiling, such as 110 to 125% of the original loan amount.</p><p> </p> <p><b>STRATEGY </b></p><p> </p> <p>A negative amortization mortgage is a mortgage that permits the borrower to defer some of the interest that is due each month to later in the life of the mortgage. The great advantage is that someone can purchase a larger home with a lower initial monthly mortgage payment. However, the borrower is required to qualify at the fully indexed rate based on a 30 year amortization. In effect, the borrower is being given a minimum payment rate at the start of the loan and a gradual increase of payment over the next five to ten years, in contract to having a fixed rate for the entire loan.</p><p> </p> <p>Specifically, negative amortization constitutes the unpaid interest that is added to the mortgage principal in a loan in which the principal balance rises rather than falls because the mortgage payments do not cover the full amount of interest due.</p><p> </p> <p>Adjustable rate mortgages typically have this feature because the amortizing interest rate is higher than the required payment rate. During times when interest rates are low, the amortizing rate can be lower than the payment rate, causing positive amortization or the reduction of principal. Recently, these types of loans have been tied to various indexes: the most popular are the 12 month treasury average index; the cost of funds index, known as COFI; and the one month London Inter bank offered rates.</p><p> </p> <p>There is a distinct advantage to investors in taking out negative amortization mortgages: these mortgages routinely permit a borrower to potentially increase his or her cash flow and reduce monthly payments. This means that the investor can manage the risks of investment better.</p><p> </p> <p><b> REASONS </b></p><p> </p> <p>Negative amortization arises due to two reasons : a mismatch between payment and rate adjustment frequencies and the imposition of payment caps. For example, in a rapidly rising interest rate environment, frequent rate adjustments increase in the monthly payment amount. If the interest due surpasses the amount of the monthly payment, the unpaid interest will be added to the principal outstanding, leading to negative amortization. </p><p> </p> <p>However, there are contractual limits on negative amortization. In general the maximum negative amortization on adjustable rate mortgages is limited to 110 to 125% of the original outstanding principal balance. Once this limit is reached, any payment caps are waived and the borrower?s monthly payment is increased.</p><p> </p> <p><b>PAYMENT RECAST AND RECAST FREQUENCY </b></p><p> </p> <p>Payment recast forces the full amortization of a mortgage. In a negatively amortization mortgage a cutoff point is necessary to force the eventual pay down of the balance to zero. The payment recast overrides any payment caps and establishes a new amortization schedule. The payment recast frequency is generally 5 years.</p><p> </p> <p><b>FEATURES OS NEGATIVE AMORTIZATION </b></p><p> </p> <li><b>Payment Rate Below the Interest Rate:</b> The payment rate, which is the interest rate used to calculate the payment, may be below the actual interest rate. If the payment rate is so low that the initial payment does not cover the interest, the result will be negative amortization.</li> <li><b>More Frequent Rate Adjustments than Payment Adjustments: </b>If example the rate adjusts every month but the payment adjusts every year, a large rate increase within the year will lead to negative amortization.</li> <li><b>Payment Adjustment Caps: </b>If the rate change is large and a payment adjustment cap limits the size of a change in payment, the result will be the negative amortization.</li> <p>Virtually all adjustable rate mortgages are designed to fully amortize over their term. This means that negative amortization can only be temporary and at some points in the adjustable rate mortgages life history the monthly payment must become fully amortizing.</p><p> </p> <p>Two contact provisions are used to assure that negative amortization adjustable rate mortgages pay off at term.</p><p> </p> <p>? A recast clause requires that periodically, usually every five years, the payment must be adjusted to the fully amortizing level.</p><p> </p> <p>? A negative amortization cap is a maximum ratio of loan balance to original loan amount, for example, 110%. If that maximum is reached, the payment is immediately adjusted to the fully amortizing level, overriding any payment adjustment cap. 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