The potential for LOW PAYMENTS is both the attraction and the danger with this type of loan program. Traditionally these loan have several payment options.

Option 1)  A reduced payment, as low as 1%; which is accomplished by adding the balance of the actual full interest payment due that month to the "Back End" or balance of the mortgage payoff amount.

Option 2) The full amount of the actual interest due each month.

Option 3) A fully amortized 30 year payment (Both Principle and calculated interest due).

Option 4) A fully amortized 15 year payment (Both Principle and calculated interest due).

Now these payment options sound simple enough... but guess which payment most everyone with this type of loan pays?  YES... Option 1! And this is where "Neg-Am Loans" are most often misunderstood because to be quite honest, even a lot of loan officers do not understand the incredible power of the concept of negative amortization, and seldom explain the dangers. If we remove the term "Negative," from the amortization portion of the name and annalise what is left we have very simply have "deferred interest," or interest that is placed onto the back end of the outstanding loan amount. "Negative" just sound so "Negative," but this aside again, if we look at the mortgage balance like a credit card, it adds additional debt to the total balance due to pay off the mortgage just as if you had charged it to your credit card. In essence you are borrowing your own equity, and paying interest for the privilege of doing so. Both very powerful... and also potentially very dangerous when misused.

These loans do have safety valves built into them in the form of "Payment Adjustment Caps," which limits the amount the actual minimum payments can increase at any one adjustment point. Additionally these loans also have "Interest Rate Adjustment Caps" that limits the amount the interest rate can adjust at any one adjustment point. So where is the problem? Well, despite the safety caps, this means that while the minimum payments that must be made may stay low contractually, the actual loan interest rate could increase even if it does not increase is far greater than the minimum payment due... and the loan balance could be rapidly growing.  If the interest rate goes up, than the amount of the interest payments due increases accordingly... and the difference between the interest due, less the amount of the payment is added to the back of the loan balance... so the overall loan amount increases. Thus the term "Negative Amortization." No other loan programs work this way, so there is a lot of potential for abuse and misuse.

Once again, this "Negative Amortization" feature is unique to this type of loan, and there is nothing else like it in the industry; which is where so much confusion about these programs arise. So how does negative amortization occur? Keep in mind that "Negative Amortization Loans" calculate two interest rates; The first is called the actual "Payment Rate;" and the second is the "Actual Interest Rate." The payment rate is typically capped at a maximum of 107.5% of the amount of the previous payments due. This is an important sales feature of this type of loan (and often confusing on purpose), because while the payments are capped, the interest rate due is calculated as the index plus the margin without such periodic caps. This can add up fairly rapidly without factoring in rising interest rates, but in periods of rapidly rising interest rates adds up even faster. Without any payments reducing the actual principal balance of the loan, the loan balance can grow rapidly... and becomes problematic if the borrowers can not afford the actual full interest payments, and are dependent on the reduced payment option.

The danger arises when the lowest payments are selected every month... which can be as much as 5% to 6% less than the interest actually due. Therefore, in terms of building actual equity in your home, negative amortization loans can trap you in a cycle of paying only the constantly growing interest, completely neglecting the principal.

What Makes These Loans so Powerful?  Negative Amortization loans can be useful if the borrowers primarily concern is cash flow and not building equity. If the borrowers only pay the lowest payment rate, the overall monthly mortgage payment should be substantially lower than your typical 30-year fixed or interest only program. Also negative amortization loans may be a good short term solution during periods when income is reduced, or if the borrowers are planning a rapid turn over of the property.

NOTE: Potential Tax Advantages; The offset interest can also have some interesting tax ramifications because depending on how the borrowers accountant declares the interest deductions, the borrowers could potentially write off the deferred interest that was added to the end of the loan. Check with your accountant on these benefits.

Neg-Am Refinance Loans;
These loan programs typically require a minimum of 10% equity with above average credit scores, and up to 15 to 20% equity with below average credit scores. Central City Mortgage has several programs that are offering "Fixed Term Periods" as long as 5 years plus amortization periods of up to 40 years. If LOW PAYMENTS are the goal, these programs may be the answer.