Home_Loans_and_Negative_Amortization

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Home Loans and Negative Amortization


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421


Summary:
Owning a home is undoubtedly the American Dream and the bedrock of middle class. Negative
amortization, however, can turn the dream into a nightmare if you are not careful.



Keywords:
mortgage, home loans, amortization, negative amortization, interest only, principal, capital,



Article Body:
Owning a home is undoubtedly the American Dream and the bedrock of middle class. Negative
amortization, however, can turn the dream into a nightmare if you are not careful.


Home Loans and Negative Amortization


When you apply for a basic home loan, you obviously must repay the loan to the lender. The repayment of
the loan is typically set over a certain time period with a certain amount being paid monthly. This process is
known as the amortization repayment schedule. In some instances, however, the repayment schedule can be
designed to have a very problematic result.


Home loan lenders have to compete for your business. To make themselves stand out, they will come up
with unique mortgage packages that make it easy for you to get into a home that perhaps is a bit beyond
your means. One of the techniques for doing this is a strategy known as graduated repayment. With
graduated repayments, you initial loan repayments are for less than the total interest owed on the loan. The
excess interest than accumulates and is usually converted into principal.


Known as negative amortization, this process can be very risky because it is based on a bet. When you
pursue a negative amortization loan, you are betting the equity in the property is going to rise faster than
accumulating interest. If the equity gain doesn’t increase, you eventually have a problem where you are
making payments on a home with no equity. When the amount owed on the mortgage exceeds the equity in
the home, you are suddenly upside down on the loan, to wit, the home has become a pure debt.


Obviously, a lender isn’t just going to sit and let the principal on a loan accumulate forever. To avoid this,
the loan will typically carry a debt cap at which point the loan automatically converts to a different loan
where you start paying the balance off or the loan may just come due. For example, the loan may contain
language that if the total debt exceeds 115 percent of the value of the home, the loan will convert or be due
in total. Either case is a nightmare because you will either suddenly have payments you can’t make or have
to come up with a bundle of cash. For most homeowners, this leads to default.


Negative amortization loans can look very attractive when you are trying to squeeze into a home just beyond
your means. Just make sure they don’t kill you in the long run.




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