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Negative Amortization And How It Gets Into Your Mortgage
As a real estate player, you have to know about the notion of negative amortization when it comes to your mortgage.
You may have heard this term being mentioned by savvy investors and those who know their stuff. Bankers may even attempt to sound professional by sprinkling this term all over their conversations with you.
As negative amortization mortgage is gaining widespread awareness. It’s appropriate to know more about the mechanics behind it.
Negative amortization occurs when your payment or interest rate ceiling keeps the actual monthly installment below the level required by the current fluctuating market interest rate.
Because you have not made payment of the interest charges in full, the unpaid portion of interest is then added on to your remaining principal amount outstanding in your loan.
Your outstanding balance will therefor increase rather than decrease.
Depending on your lender or the terms stipulated in your mortgage, the lender may extend the tenure of your loan or make changes to your subsequent payments accordingly based on the new outstanding amount that is due outstanding.
If they are really able to do this, it must be written somewhere in the facility teller. If you can’t find them, maybe they are in the fine print.
Negative amortization mortgages can come into the picture in these ways:
1) Minimum-payment options
Negative amortization commonly occurs in this instance as you pay a minimum monthly payment.
So even when you are supposed to pay more according to the market interest rates, you are only obliged to make the minimum payment amount as stated in the terms.
This will result in negative amortization.
2) Interest only options
As you are required to make interest payments only in this type of loans, your principal neither increase or decrease.
You can read more about interest only loans here.
3) 15 year and 30 year mortgages.
A savvy player is likely to take up loan structure that allow him to make only interest payments so that he makes full leverage of the financial instruments available to him.
It allows him to have greater access to cash for other investment vehicles.
However, if your appetite for risk is low, think twice before going headfirst into it.
When interest rates are jumping around all over the place due a sensitivity to market movements, it can get very stressful for home owners who are uncomfortable with taking risks.
Generally, the longer a tenure is, the lower the monthly payment will be.
Most people choose to take up a longer term loans so as to put less stress on their personal financial position.
However do note that the longer a mortgage stretches out, the more total interest you will eventually pay if you hold on to it for the full term.
You must use reasonable assumptions when considering these types of arrangements.
Things can happen which directly affects deals structured this way which you have absolutely no control over.
If you are using a calculator found on the internet, do take note of it’s limitations. It would either be the perfect one designed just for you, or it can be totally irrelevant for you.
Types of mortgages to consider
It might surprise you that there are more than 1 type of mortgage for your consideration.
We usually think of it as just money that are the same anywhere. But their differences lie in how they are structured and for what purpose that are created for. Here they are for your observation.
If you are just a home owner who has no aspirations on investing in real estate, don’t confuse yourself with all these jargon. Stick to what you understand of it. You will be fine.
Sometimes when sales people get aggressive in their work, they attempt to confuse the heck out of you. Ignore those noise from your head.
The most common reason for someone to refinance their home is to enjoy a lower mortgage rate.
As every lender are effectively selling the same product which is money, it makes little sense to pay more that what is required on your home.
There are however, logical reasons why someone want to restructure their loan to one with higher interest rates. We are not going to talk about that today.
From historical data, it can be observed that mortgage interest rates move in trends following economic performances.
So if you have signed up a deal during economic boom periods, make it a point to look out for refinancing options when the economy slows down as there will be opportunities for huge savings.
The word term is used interchangeably in the industry with “tenor”, “tenure”, “period”, “length”, among others. They basically mean the total time frame of the loan. It can stretch out 15 years or even 30 years.
For real estate flippers who buy properties, add value, and sell quickly, they might go for loan periods as short as 6 months to 1 year.
A common home owner usually would want to lengthen the term so as to decrease the monthly payments, or shorten the term to increase monthly payments.
The former will incur more interest charges while the latter will help save on interest charges. It is not uncommon for individuals to restructure their loans by amending both the interest rates and the term.
This is usually decided when an officer or a broker breaks down all the numbers for the home owner to scrutinize. When all these data is put in an overview, sometimes which decision to make can be a obvious one.
Cash out refinancing is often referred to as home equity loans. It involves refinancing your existing mortgage and on top of that, draw down an additional term loan in cash for other uses.
The total quantum you will be able to draw depend on the property value, your outstanding loan, and your personal income.
For some investors, they might have already took out the equity in their properties.
In this case, they can still go this route to restructure their loans for better rates or for more cash from equity.
Other types of mortgages that are used which are less common include, those for multiple liens, note modifications, streamlines, foreclosure bailouts, investment properties , home improvements , equity loans , etc.