Negative Amortization
“We’re starting to shop lenders and loans before we buy a condo in University City. One gal we talked to told us about a loan that has negative amortization. What exactly is that, and is it something we should avoid?”
***ANSWER:
Some adjustable loans allow payments that don’t cover all the interest due, thus letting you defer some or all of the interest (which is why they’re also called “deferred interest” loans.) The interest is added to your loan balance, making the balance grow instead of shrink. Lenders limit how much interest you can defer before you have to start making payments covering interest and principal.
Is a negative amortization loan something to avoid?
Not necessarily. Many people love the flexibility these loans offer because they allow them to have a lower payment, while giving them the option to make a higher payment covering all the interest and even paying down the principal.
I think a big reason negative amortization loans have a bad rep is simply the name! How can anything that’s “negative” be positive?!
