When it comes to mortgages, there are many different kinds available for homeowners and prospective homeowners to choose from. Banks and other lenders in the financial services industry have created many different kinds of financial products in order to make financing the things we want easier and more convenient, depending on the borrower's needs. One of these specific kinds of mortgages is the negative amortization mortgage. While that may sound like a mouthful, a negative amortization mortgage is actually pretty easy to understand.
In order to understand how a negative amortization mortgage works, you first need to understand how a fully amortizing mortgage works. A fully amortizing mortgage takes your monthly mortgage payment and applies a sum, usually the majority of the payment, towards the interest that is being charged on your loan principal. So, if your mortgage is, $1,000 a month, $800 of that will go towards paying off the interest accrued over the month. The remaining $200 will go towards the loan principal. So, if the loan principal was $100,000 at the time of the payment, it will now be down to $99,800. That's the amount of money you're paying interest on.
In the case of a negative amortization payment, let's say you only pay $600 a month on the loan of $100,000, but the interest charges come to $800. With a negative amortization mortgage, you still owe $200 on the interest, and haven't paid anything off on the principal. So, what happens is that the $200 then gets added to the loan principal. At the end of the first month, the principal will be $100,200.
Don't get confused between negative amortization and reverse mortgages. To find out more about negative amortization mortgages, fully amortizing mortgages and any other kinds of mortgages, be sure to consult with your financial advisor or bank representative who specializes in mortgage loans.
