Question:

How does adjustable rate mortgage amortization becomes negative?

Answer:

The adjustable rate mortgage amortization gets negative anytime you are paying less than the interest-only payment.

The interest-only payment will usually be offered as an option with any ARM. It will cover the accrued monthly interest and you will not be paying anything towards principal. That means that at the end of your fixed period, you will have as much debt as when you started with the loan, be it 2, 3, 5, 7 or 10 years accordingly.

Another payment option with an ARM will be the minimum payment. With this option, you will not be paying even the accrued interest and this is how negative amortization for an ARM (adjustable rate mortgage) occurs. The difference between the interest-only and the minimum payment will be added to the principal and once your loan begins to amortize, you will owe more than you borrowed.

Example of Negative Adjustable Rate Mortgage Amortization

If your interest-only payment on a 3/1 ARM is $720 monthly, and the minimum payment is $550, the $170 difference will be added towards your principal every month. When the 3-year period expires, you will owe 36 times 170 equals $6120 dollars more than what you were loaned.

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