Negative amortization mortgages are loans where the monthly payment is not enough to cover all of the interest due for that month. The unpaid interest is added to the mortgage principle balance; this means your mortgage loan is actually growing with time. There are certain circumstances where negative amortization mortgages make sense and can be a short term fix to a financial need; however, many homeowners experience negative amortization with their mortgages and don’t even know it. Here is what you need to know about negative amortization and your mortgage.

Many homeowners are taken in by mortgage offers with monthly payments that sound too good to be true. When they fail to ask the right questions or read the fine print they find out too late their payment amount did not include all the interest due and their mortgage has been negatively amortizing. If you take out one of these mortgages the money you save on your monthly payment will end up costing you a great deal more down the road.

Normal amortization describes the process where at the beginning of your loan most of your payment is applied to interest and very little of the payment is applied to loan principal. As time passes this proportion of your monthly payment gradually reverses and more of the payment is applied to the loan principal. Mortgages with negative amortization never accomplish this reversal; there is never enough interest paid to cover the interest due. The mortgage balances grows with time rather than being reduced.

An example of a negative amortization mortgage is an Adjustable Rate Mortgage that allows the homeowner to pay an optional monthly payment amount. To illustrate this concept consider a standard mortgage that has a monthly payment of $1,000. At the beginning of the mortgage, $650 or this payment is applied to interest, and $350 is applied to mortgage principle. The same payment with a negatively amortized mortgage would be as low as $500 per month; this leaves $150 of unpaid interest each month that is added to the loan balance. Using a mortgage of this type, you will owe more for your home at the end of the month than you did at the beginning of the month.

There are certain situations where having a negatively amortizing mortgage could make financial sense. If you were to lose you job or have an unforeseen financial emergency a negative amortization option on your mortgage could ease your cash flow situation. This should only be used as a short-term solution as it will cost you a great deal more down the road. Negative amortization mortgages can also be utilized by real estate investors looking to quickly flip a property while keeping their monthly mortgage payments as low as possible. Use these loans with caution, as negatively amortized mortgages are a sinking ship that will take your finances down with it. To learn more about your mortgage options and how to avoid common mortgage mistakes, register for a free mortgage guidebook using the links below.

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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.

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