Negative amortization loans calculate
two interest rates. The first is called the payment rate
the second is the actual interest rate. The payment rate
is typically capped at 7.5% of the previous payment. The
true interest rate is calculated as simply the index
plus the margin without periodic caps. Borrowers are
given a choice of which rate to pay. Thus advertisers of
negative amortization loans often refer to these loans
as "payment option" loans. While it is true that the
borrower has a payment option, which offers flexibility,
the borrower will also be subject to the true interest
rate.
A loan that
allows negative amortization means the borrower is
allowed to make a monthly mortgage payment that is less
than the interest actually owed during that month. For
example, let's say we have a $200,000 loan with an
adjustable rate that's currently sitting at five
percent. Simple interest on this loan is easy to
calculate. Multiply the interest rate by the loan amount
and you have the annual interest of $10,000. Divide
$10,000 by 12 months and the monthly "interest only"
payment is $833.33 or simply here is the formula for
your monthly payment for interest only loans: loan
balance x interest rates / 12 = monthly
payment.
Now, let's say
that there's a provision in the loan documents that
allow the borrower to make a minimum payment based on a
"payment rate" of four percent. So your lowest payment
would be $666.67 because the "payment rate" is based
upon four percent, not the actual interest rate, which
is five percent.
So if you make
make the lowest allowable payment you are actually
losing $166.67 in equity. The balance of the loan
increases to $200,166.67.
Simply said with
neg-am loans is that if you don't make the full payment
and the rest of the payment will be added to your
loan balance, thus increasing your loan balance. It is
up to you how much your monthly payment will be.
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