Unconventional Mortgages by Brian King

Negative amortization loans might not be as popular as other mortgage products, but they may be more appropriate for certain buyers in unique situations. Mortgage solutions that can be classified as negative amortization loans include:

•Graduated payment mortgages
•The option adjustable-rate mortgage (ARM) or flexible payment ARM
What is a Negative Amortization Loan?

A regular mortgage payment pays the interest due on the loan and a portion of the principle, and reducing the loan is known as amortization. A negative amortization loan is a financing option whereby the regular payments made by the borrower are so low that they neither pay down the principal nor pay the interest entirely. Consequently, the balance of the loan owed to the lender continues to increase, and is, therefore, referred to as negative amortization.

Homebuyers who do not have a great deal of extra income and cannot contribute large monthly payments often choose a negative amortization home financing product. However, in order to keep your debts under control, it is necessary to increase the amounts of your regular payments later in the mortgage's life. Otherwise, when you sell your home, you could end up owing your lender more than the house is worth.

The Basics of Graduated Payment Mortgages

One type of negative amortization loan is the graduated payment mortgage (GPM). With a GPM, the regular payments start low and gradually increase over a specified length of time as the mortgage matures. Because the initial lower payment amount is used to determine qualification, a GPM is great for borrowers who might not otherwise qualify for a mortgage. This type of mortgage is designed largely for younger borrowers who forecast greater financial earnings in the future, though they may not presently be equipped to carry a conventional mortgage.

The drawback of the GPM is higher interest rates than other types of fixed-rate mortgages. Lenders charge a higher rate because the low payments made at the beginning of the mortgage do not fully cover the principal or interest, meaning the lender is continuously increasing the loan amount.

The Option ARM or Flexible Payment ARM

A second type of negative amortization mortgage product is the option ARM. It is a type of variable-rate mortgage that allows borrowers the freedom to choose what kind of payments to make. The options are:

•Fully amortized payments
•Interest-only payments
•Minimum payments that will not cover the interest or pay down the principal
With an option ARM, the interest rate is adjusted monthly, and the payments are adjusted every year. The regular payments are always lower in the beginning with a flexible payment ARM, meaning borrowers can often qualify for a larger loan.

Like with the GPM, the risk with this type of mortgage product is payment shock, which can happen when borrowers making minimum payments are not prepared for the sudden and dramatic increase in their payments that occurs when the interest rates rise or the annual repayment adjustment takes place.