Question:

What are the deferred interest loans?

Answer:

Deferred interest loans are negative amortization loans - that is, adjustable rate mortgage loans that allow for loan balance increase due to earning but not paying the interest. Deferred interest, generally speaking, is the unpaid accrued interest on a mortgage loan.

For example, Option ARMs have a minimum payment option that most often does not cover the interest accrued on the loan. Therefore, the difference between the interest-only payment and the minimum payment will be added to the principal and result in mortgage balance increase and, most often, interest will be incurred on the deferred interest, as well.

Deferred Interest Loan Specifics

Deferred interest loans (also called Neg Am loans) will allow for the minimum payment option until the mortgage loan balance reaches a limit specified on the loan agreement.

Usually, most deferred interest loan programs will set this limit at 110% up to 125%. When the limit is reached, a fully amortizing payment plan will be triggered and the loan will be recast regardless of the annual rate increase cap.

The borrower will have to make monthly payments that pay off the mortgage in full within the remaining term of the mortgage.

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