Are there advantages of negative amortization (deferred interest)?


Well, very often negative amortization (deferred interest) mortgage loans, such as the Option ARM, are referred to as bad option. Some brokers and loan officers discourage consumers right away from taking Neg Am (deferred interest) home loans. Why do they do this?

To get a better understanding why, let's start with what a deferred interest mortgage (with negative amortization) is.

This is a home loan with your house taken as collateral whose balance will go up for the lifetime of the loan. Those loans offer very low monthly mortgage payment, which earns unpaid interest. This interest is added to the loan balance and you end up owing more than you borrowed. The balance usually is allowed to go up to 110 to 125% of the original mortgage loan amount. When this limit is reached, loan balance is recast and fully amortizing principal and interest payments will be required.

This seems to be a nice option - while borrowers make use of the minimum ultra low payment for deferred interest Neg Am loans they have free cash to use elsewhere:

  • Pay other bills;
  • Save up;
  • Invest;
  • Or simply take their time while their income flow goes back to normal.

Then why loan officers often don't recommend negatively amortizing mortgage loans?

Well, sometimes consumers don't understand the complexity of the Neg Am mortgage. They somehow end up thinking they got a nice deal with those 1-2% rates. When principal and interest payments become due, the monthly mortgage payment may triple and those borrowers can be foreclosed upon. With the current subprime crisis and more restrictive lending guidelines, underwriters are more careful recommending those loans as they don't want the liability.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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