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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