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Negative Amortization and Your Mortgage

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There’s a nasty trend forming in the mortgage industry.  Mortgage lenders offer Adjustable Rate Mortgages with an introductory interest rate of 1.95% that resents to 4.95% after one year.  Sounds like a good deal? 

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What the lender doesn’t want you to read in the fine print is that the 4.95% isn’t the full interest rate of this “option” adjustable rate mortgage.  The monthly payment at 4.95% interest is the minimum payment option for this loan.  The remaining interest is added on to the principal loan balance.  This concept of a mortgage that grows over time is called “negative amortization.” 

Negative amortization means you never build equity in your home.  All the money you pay each month goes to service the debt, and it’s not enough to cover all the interest due.  Option adjustable rate mortgages are referred to as the “riskiest” mortgage loans in the industry. 

If you are a homeowner that signed up for one of these loans you should refinance as soon as possible to a traditional, fixed interest rate mortgage.  For more information on a Savannah mortgage refinance, sign up for our free mortgage guide: “Five Things You Need to Know before Refinancing Your Mortgage.”

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