Online Amortization Help
It's scary to think you could owe your lender more, instead of less, principal after making a mortgage payment. But that's precisely what happens with online amortization schedule. Are your fears justified with a "NegAM" adjustable mortgage? I don't believe they are _ if you understand how the mortgage works. In fact, a "NegAM" ARM can offer unique benefits.
What's amortization? Amortization refers to paying the loan principal off through individual payments over time. This is accomplished with a monthly payment in which part goes to pay the accrued interest from the date of the last monthly payment and part is applied to the principal. In the early years of a mortgage, the portion of the monthly payment applied to the principal is small compared to the interest paid. Gradually, as the principal is paid down, the amount of interest owed each month gets smaller and smaller.
"Positive amortization" means that as interest accrues, it's fully paid in each monthly payment cycle. Second, some of the principal gets paid each month in order to discharge the debt over the term of the loan. "Negative amortization" refers to when the principal increases after a monthly payment is made. It's the equivalent of a mortgage flat tire. This occurs because the monthly payment is not large enough to cover the amount of interest owed, and the unpaid interest is added to the principal.
The important thing to know is that negative amortization can be prevented. You'll always have the option of paying the interest in full each month for a NegAM loan, because the lender's monthly bill shows the minimum payment due along with the monthly interest charge. Finally, a word of caution. I wouldn't recommend allowing negative amortization to occur with the justification that appreciation will cover the loss. There's no escape: Pay now or pay more lately.
How does a NegAM ARM work? ARMs have "caps" to protect you in case of sky-rocketing interest rates. In a NegAM ARM, however, one of these caps _ the payment cap _ only goes halfway in shielding you. On the plus side, a payment cap keeps your monthly payment from adjusting up more than 7.5 percent at one time. This is a great feature for an adjustable mortgage, because it cushions those big increases and helps you stabilize your budget. The bad news is that a payment cap won't stop the lender from charging you the full amount of interest that has accrued since the last monthly payment.
If the monthly payment doesn't cover the full amount of interest charged, then the unpaid interest gets added back into the principal. This is a double bind _ not only is your principal rising as you make a payment, but you end up paying compound interest (interest charged on interest) with the next payment. Two other important features of NegAM ARMs are the payment and interest-rate adjustment methods. Typically, the monthly payment adjusts once a year based on a rate that's calculated by adding the margin plus the index.
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