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Adjustable_Rate_Mortgages_and_Negative_Amortization

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					Title:
Adjustable Rate Mortgages and Negative Amortization

Word Count:
389

Summary:
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.


Keywords:
adjustable rate mortgages, negative amortization


Article Body:
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.

				
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