Owning a home is undoubtedly the American Dream and the bedrock of middle class. Negative amortization, however, can turn the dream into a nightmare if you are not careful.
Home Loans and Negative Amortization
When you apply for a basic home loan, you obviously must repay the loan to the lender. The repayment of the loan is typically set over a certain time period with a certain amount being paid monthly. This process is known as the amortization repayment schedule. In some instances, however, the repayment schedule can be designed to have a very problematic result.
Home loan lenders have to compete for your business. To make themselves stand out, they will come up with unique mortgage packages that make it easy for you to get into a home that perhaps is a bit beyond your means. One of the techniques for doing this is a strategy known as graduated repayment. With graduated repayments, you initial loan repayments are for less than the total interest owed on the loan. The excess interest than accumulates and is usually converted into principal.
Known as negative amortization, this process can be very risky because it is based on a bet. When you...
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