Sometimes people may confuse the way negative amortization works with how reverse mortgages work. Although the two are both used as strategies in the real estate market, they literally have nothing in common except they are both ways to borrow money. The confusion happens since both loans have different monetary resources that add to the principal balance, ultimately increasing the debt accrued by the loans.
A negative amortization mortgage involves only making partial payments towards your mortgage and the remaining balance is added onto the mortgage principal. When the principal balance of your loan is increased because the payments you are making do not cover the total amount of interest due, then you are witnessing negative amortization. The principal amount of a negative amortization loan grows because of deferred and partial payments.
Negative amortization is associated with purchasing of homes using adjustable rate mortgages (ARM). Many times those who specialize in "flipping" properties opt into ARM loans because they do not expect to hold onto the property long enough to have to pay the increased rates that happen during the course of the loan cycle.
The interest for a reverse mortgage loan is compounded and added onto the principal interest, thus making the principal amount grow. Although it appears to work like an adjustable rate mortgage that is not the case at all. The principal of a reverse mortgage grows because of compounded interest.
People who already have built their home equity reserves can only use reverse mortgages. Homeowners over the age of 62 can secure reverse mortgages. A reverse mortgage is a loan that taps into the equity you established in your home and provides you with a portion of the value in cash that does not have to be paid back.
Don't get confused by associating negative amortization and reverse mortgages. The two have nothing to do with each other, have no similarities with the way they work, and are not even used for the same reasons.
