How to explain the negative amortization schedule?


The negative amortization schedule applies to loans with deferred interest option. That is, option ARM home loans mostly. Loan amortizing generally refers to principal repayment. For instance, every loan has principal and interest to pay. Of course, there are other fees and costs included in the PITI payment, but principal and interest are the most significant ones.

Principal is what you borrowed from a lender. Interest is the cost of borrowing this money. Monthly payment for loans without negative amortization has part of the principal and all interest due included in it. Negatively amortizing mortgage schedules are structured in a different way. The following example is a rough one to just give you a hint how these loans work. Your negative amortization mortgage loan schedule and terms are going to be very different, and the starting rate will most likely be higher (3-4%) and floating (adjustable) to allow for smoother transition and avoid payment shock.

How is mortgage loan negative amortizing schedule explained?

Let's take an example: have a look at a mortgage loan of $250,000 for 30 years at 5.5% effective interest rate and 1.5% minimum payment allowed for 5 years, or until the loan balance limit of, say, 110% is reached. The effective interest rate might be flowing, too. But assuming it is fixed, the example will make more sense for the reader to follow.

Loan amount:


Interest rate:


Amortizing period:

30 years

Minimum payment of 2% allowed for 5 years or until loan balance reaches $275,000 (110%) negative amortization cap.

Interest-only payment at 5.5%


Minimum payment at 1.5%


Difference between interest-only and minimum payment:

1145 - 312 = 833

Deferred interest of $833 added to principal balance every time minimum option is used.

You could have the minimum payment option for the negatively amortizing mortgage balance for ((25,000 / 833) / 12) = 2.5 years

Explanation: you can make ONLY minimum payments at 1.5% for straight 30 months. After that your loan balance will reach $275,000 and the loan will be recast.

There will be usually two options for paying off a deferred interest loan when loan limit is reached:

1. Either interest-only payment will be allowed - $1260 at 5.5% for 2.5 years

2. Or you will have to make fully amortizing payments for a loan of $275,000 at, say, 5.5% for 27.5 years - $1618/month

The lender may agree to restructure your loan for a fee, or change your interest rate, or mortgage amortizing term (say, make it 40 years instead of 27.5).

You need to be informed and aware how your negatively amortizing mortgage payment schedule will change over time, so demand as much detail as possible from the lender.

It's not a good idea to negotiate mortgage restructuring in the last moment when you are already late with the mortgage. Consider discussing your mortgage terms well before you exhaust your minimum payment options.

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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