Question:

Do I need to know the negative amortization formula for mortgage loans?

Answer:

Knowing the negative amortization formula is not necessary when you are taking a mortgage loan. Rather than formulas, what you need to know is the negative amortization cap and schedule because your payments will increase when the recast limit is reached.

What is a recast on home loans with negative amortization?

The recast on those loans can be two types: standard and event-triggered.

The standard recast period is a timeframe during which borrowers are allowed to use different payment options and some of them lead to negative amortization. When the recast period expires, usually in 60 months, your new payments will be fully amortizing on the newly calculated loan balance for the remaining mortgage term.

Event triggered Neg Am mortgage loan recast occurs in a result of making too many minimum payments - the loan principal increases and when it reaches certain limit (called negative amortization cap) your payments will be increased according to your mortgage papers. Usually, annual payment rate increase cap will apply for the months before the scheduled recast date is reached.

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