What is the negative amortization cap for mortgage loans?
Answer:The negative amortization cap for a mortgage loan is the limit your loan balance can go up with the borrower making minimum monthly payment.
Negative Amortizing Loans Cap Set at 125% Maximum
Most Neg Am home loan caps are usually set at 105% to 115% by the lender. 125% as the limit allowed by federal mortgage law.
For example, with a mortgage of $200,000 with 110% negative amortization loan cap you can have minimum payment allowed until the loan balance reaches $220,000.
Loans Using Negative Amortization Balance Limit
These are mostly Option ARM mortgage with flexible payment plans. They usually allow
- Minimum payment of 1-3%;
- Interest only payment;
- Fully amortizing principal and interest payments for different periods - 15, 20, 30, 40 years. 15 and 30-year payment plans are most common.
Those loans will be usually adjustable rate loans, meaning the interest rate can go up or down, following the market trend and an ARM index and it will often go up. Now, with the current mortgage trend, the minimum payment is likely to be higher than usual, and the negative amortization mortgage loan cap will be set lower - say, at 105%.
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