Negative Amortization
If you are one of the many people who has purchased home in recent years utilizing adjustable rate mortgages, you may want to take a good look at your next mortgage statement. Many niche ARM products allow borrowers to choose the payment they wish to make every month. This is especially common with interest-only type products.
As interest rates began to creep upward, if you continued to make the same minimum interest-only based payment, you may discover that your loan balance is bigger now than it was when you bought/refinanced the property. When you make only minimum payments, which often doesn’t even cover all the monthly interest, let alone any principal, the amount you underpay each month is added to the loan balance by the lender.
The result: if you’re not careful, you could find yourself owing more on the property than you originally paid for it, especially if you purchased with 100% financing.
The remedy: look at your mortgage statement every month. Make sure your monthly payment covers all interest and preferably something to the principal, even if it’s only $10 or $20 a month. This will ensure that you are keeping up with your interest charges and reducing your principal balance a little too. Even small amounts, paid regularly, can whittle away the principal on your loan.
This can prevent you from experiencing the potential risk of negative amortization.