Most Complete Information about Loans, Credits, Mortgages

Adjustable Rate mortgages and Negative Amortization

Written by: Dan Lewis

For many borrowers, adjustable rate mortgages are an attractive
means of qualifying for a home. Fewer borrowers realize the
potential negative amortization problems these loans can create.

Adjustable Rate mortgages

Adjustable rate mortgages are very popular with home buyers. The
popularity arises from the fact the initial interest rate on
such loans is typically much less than one finds with fixed rate
loans. As a result, home owners can squeeze into homes that they
might not otherwise be able to afford with fixed rate mortgages.

The potential risk with adjustable rate mortgages is well known.
A borrower runs the risk the interest rates will increase over
the years, resulting in financial hardship when month mortgage
payment amounts go up. If the rates and payments go up to much,
the borrower can run into serious problems trying to make
payments and may even lose the home.

To overcome the fear of rising rates, many lenders use caps on
rate increases to entice home owners. These caps essentially
limit the amount the monthly payment can increase for any fixed
time period. For many loans, the period is one year and the rate
increase is one percentage point. While this makes borrowers
feel more secure, there is one little thing lenders fail to
point out.

Negative Amortization

On many adjustable rate mortgages, the caps apply only to the
monthly payments due on the loan. The caps do not apply to the
actual interest rate being charged on the loan. This situation
leads to a financial disaster wherein you are making the monthly
payments, but actually seeing the principal of your loan
increase. This situation is known as negative amortization and
should be avoided at all costs.

Negative amortization is best explained using good old credit
cards for an example. If you have credit card debit, and
everyone does, you know that making the minimum monthly payment
may not make a dent in the total balance. In fact, it may be
less than the interest charged for the month. This becomes
apparent when you receive the next bill and your balance has
increased! Welcome to the world of negative amortization.

On an adjustable mortgage, you need to read the fine print to
full understand how any caps apply to your loan. Whatever you
do, try to stay away from negative amortization whenever
possible.

About the author:

Dan Lewis is with http://www.gwhomeloans.com - a San Diego
mortgage brokers providing San Diego home loans. Visit
http://www.gwhomeloans.com/services.html to learn more about
options on San Diego mortgages from a San Diego mortgage broker
company.