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Negative Amortization or Pay Option Mortgages

Negative Amortization loans have become very popular during the last few years.  A negative amortization loan is one in which the monthly mortgage payment you make actually covers less than the interest you pay during the month.  It sounds strange at first but the idea is to allow your payment to be artificially low for a given period of time to improve your monthly cash flow. 

Know your fully adjusted rate

So if your payment is based on a interest rate of 1.25%  but your real fully adjusted rate is 7.875% you have quite a difference in interest payments on any given month.  If you make the minimum payment, that difference in rate is tacked on to your loan balance so you could owe more than you originally borrowed!

The difference in the amount owed to the amount originally borrowed could make for an unpleasant surprise when refinancing or selling down the road.  Negative amortization loans are accommodating and useful when used for a temporary situation but may get you into trouble if relied upon for a long period of time. 

Know the risks of this loan

Problems may arise when it comes time to refinance if there is insufficient equity in the home to drop the rate or mortgage into a lower rate loan again.  If you are unable to make at least the interest only payment, you may have to sell your home.    That’s why determining your monthly budget based on this type of loan is probably poor planning for the long term.

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If you are considering a refinance mortgage in California, New York, Florida, Texas or any state within the US, you may find a mortgage quote from our network of lenders. A mortgage refinance quote is available for any one of a number of programs, whether that be a 30 year fixed mortgage 15 year fixed or a shorter term adjustable such as a 5/1, 3/1, or 10/1 Adjustable rate mortgage.

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