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Concern Over Negative Amortization

Many of my clients have expressed some concern over the potential for deferred interest or negative amortization in  this type of mortgage. While it is immediately obvious that you are in control over when you choose to use the minimum payment rather than the interest only payment, I do recognize that many will use the minimum payment option and will create some negative amortization balance. This page will show you just how small a rate of appreciation will be required to offset te use of the minimum payment every month.

Example:

Appreciation vs. Negative Amortization

$300,000 loan at 80% LTV
Fully Indexed Rate increases to 7.5% in month 2 and remains constant for 1 year (VERY high rate by today's standards but I want to show a worse case.
Minimum payment rate 1%
Interest due:                $1870.53 ($299,285* x 7.5%/12 months) *unpaid principal balance after first payment
Minimum payment:    $ 964.92   (1% rate calculated as a P&I payment for 30 years)
Difference                  $ 905.51    ($1870.53 - $964.92)
Annual amount           $ 10,867.32 (905.61 x 12 months)

Annual negative amortization or deferred interest            $10,867.32
Divided by Original market value of the home                   $ 375,000
Appreciation needed to offset negative amortization        2.90%

If you selected the minimum payment every month, at a 2.90% appreciation rate, you break even from an equity perspective, greater appreciation gives you more equity. If you invest the $10,867.32 in any investment paying greater than 1% you are even better off than at the beginning of the mortgage.

As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your debt is structured today can have a life changing effect in the years to come.  Read more about this free, no obligation service.

New! View my Wealthbuilder presentation and learn the safe way to manage your debt and fund your retirement.

I hope the information on this page was useful to you. Please scroll down to view my Mortgage Market Guide. It is a weekly publication explaining the financial markets from a consumer's perspective that is available on this website or by email subscription. I have nearly 8,000 subscribers today and would be happy to have you as well. Your email address will never be used for any other purpose.