Understanding Negative Amortization: What Homeowners Need to Know
Negative amortization can occur when the monthly mortgage payment amount is insufficient to cover both the interest and principal of the loan, resulting in a gradual increase of the loan balance instead of a decrease. Ideally, the overall loan balance should progressively decrease throughout the life of the loan.
Fixed interest rate loans are generally unlikely to be affected by negative amortization, as the interest rate remains constant for the duration of the loan. Conversely, adjustable-rate loans are susceptible to negative amortization, since their rates fluctuate at scheduled intervals.
Borrowers can reduce the chances of experiencing negative amortization on their home loans by choosing an adjustable-rate mortgage that offers caps on interest rate increases. Discussing this with your mortgage broker during the preliminary stages of the application process will help you select the most suitable loan tailored to your financial needs.
By being proactive and informed, borrowers can make strategic decisions to secure a mortgage that aligns with their goals and avoid the pitfalls of negative amortization.
Related Terms: Amortization, Fixed-Rate Mortgage, Adjustable-Rate Mortgage, Loan Principal, Interest Rate.
