Negative amortization

Amortization refers to the process of paying off a debt (often from a loan or mortgage) through regular payments.

The result of this is that the loan balance (or principal) increases by the amount of the unpaid interest on a monthly basis.

The purpose of such a feature is most often for advanced cash management and/or more simply payment flexibility, but not to increase overall affordability.

All NegAM home loans eventually require full repayment of principal and interest according to the original term of the mortgage and note signed by the borrower.

Most loans only allow NegAM to happen for no more than 5 years, and have terms to "Recast" (see below) the payment to a fully amortizing schedule if the borrower allows the principal balance to rise to a pre-specified amount.

This loan is written often in high cost areas, because the monthly mortgage payments will be lower than any other type of financing instrument.

Negative-amortization loans, being relatively popular only in the last decade,[year needed] have attracted a variety of criticisms: In a very hot real estate market a buyer may use a negative-amortizing mortgage to purchase a property with the plan to sell the property at a higher price before the end of the "negam" period.

Therefore, an informed investor could purchase several properties with minimal monthly obligations and make a great profit over a five-year plan in a rising real-estate market.

In this situation, the property owner may be faced with foreclosure or having to refinance with a very high loan-to-value ratio requiring additional monthly obligations, such as mortgage insurance, and higher rates and payments due to the adversity of a high loan-to-value ratio.