BOULDER, CO, May 21, 2013—If you’re applying for a mortgage for the first time, it may feel like you’re learning a second language. All of the terms and regulations can seem daunting. One that doesn’t need to be is “amortization,” which is just the act of paying off debt in regular installments over a period of time.
“When you amortize a loan you basically pay off the principal by making regular installment payments,” says Phil Boren, Broker Associate of RE/MAX of Boulder, Inc., who explains that this process typically takes place gradually over several years.
Another term you may be hearing is “negative amortization.” What is the difference? When your monthly payment isn’t enough to cover the loan interest, then your loan principal increases rather than decreases. This is called negative amortization, otherwise referred to as “deferred interest.”
“Negative Amortization causes the loan balance to increase rather than decrease,” says Boren. This often happens with adjustable rate mortgages (ARMs).
Negative amortization has to be repaid, which means your payment will rise in the future.
“The larger the negative amortization, the more you will be required to amortize the loan in full,” says Boren.
So you may be wondering, why would anyone use a negative amortization loan?
“The main reason people use negative amortization loans is to lower monthly payments,” explains Boren.
“Some homeowners use loans with negative amortization to purchase a house they otherwise can’t afford, resting on the idea that in the future, they will have more income and can make larger payments.”
“With negative amortization, a persistent rise in interest rates reduces the equity in the house unless the negative amortization is offset by house appreciation,” says Boren. As a result, some use negative amortization if they believe that the house will be worth much more in the near future.
For more information on homeownership, please contact RE/MAX of Boulder, Inc. at firstname.lastname@example.org, 303-441-5647, or RE/MAX of Boulder, Inc..
Phil Boren is a 26-year veteran real estate Broker and Realtor, specializing in consulting with buyers and sellers in Boulder, CO and along the Front Range of Northern Colorado. Held Real Estate Broker's license in Texas, California and Colorado; Managing Broker for over 200 agents and Brokers for Century 21 and RE/MAX franchises. Award-winning Realtor with experience in management, sales, marketing, relocation, appraisal, REO, BPO's, foreclosures, short sales; previously held the MAI designation from the Appraisal Institute. Experienced in both residential and commercial real estate and achieved the No. 14 individual ranking in the 5-state, Mt. States Region for RE/MAX International in 2001, based on sales volume. Received my BSBA in Finance and Real Estate from the University of Arkansas in Fayetteville, where he was a 4-year starter and 4-year football letterman for Hall-of-Fame coach, Lou Holtz.