One type of Non-qualified Mortgage Loan (or a Non-QM Loan) is the Neg Am Mortgage Loan. In a Neg Am loan, you are not required to pay the monthly interest of the loan. You are only to make minimum payments in a specified number of payments periods.
Amortization is the process of paying off borrowed financing, say a mortgage loan, on scheduled payments over a specified period of time. Each time a borrower pays, a part of it covers the monthly interest, the remaining balance goes towards the principal.
By the end of the loan term, the principal loaned amount and the total interest are paid off completely.
Neg Am stands for negative amortization. It is also known as graduated payment or deferred interest. Because you are not required to pay any amount on the monthly interest, this interest (or whatever interest is left for that month) will rollover to the next month. The unpaid amount will be added back to the loan balance and the loan’s interest rate will apply towards this new loan balance.
What happens in a Neg Am Mortgage Loan?
For Instance, In May, Sam’s remaining principal balance is at $90,000. The annual interest rate of the loan in 6%.
0.06 (interest rate) ÷ 12 (months) x $90,000 (principal balance) = $450 (due for May)
Sam is allowed to makes minimum payments of $400 for a specified period of time. And if Sam pays $400 on the current month’s due, that sets her back $50.
$450 (due for May) – $400 (minimum payment required) = $50 (deferred amount)
The deferred amount will be added to the remaining principal balance, bringing it to $90,050 in total. In June, the computation will be based on the new principal balance. As this continues each month, the principal balance also grows bigger.
What good can someone get from a Neg Am mortgage loan?
This loan product is good for those borrowers who intend to take advantage of the low monthly payments and use their remaining money as investment. If the investment pays much higher than the mortgage loan’s interest rate, this can cover the increasing principal balance and have more left for their savings accounts.
The Neg Am is popular with those who are not staying in the property for a long time and are planning to sell it shortly after they have purchased it.
The risk of the loan becoming uncontrollable is high. If the principal loan amount is not reduced during the specified period where you are only to make minimum payments, you will end up owing much more than the what you originally owe.
And when this specified “negative amortization” is over, you end up with such a huge amount to pay off. This may cause you to default on the loan and risk the property into foreclosure.
A Neg Am mortgage loan is not intended for everyone. If you can very well afford to get a traditional loan, might as well take that opportunity. If you think that this loan product fits your financing needs, do not hesitate to talk to a lender or a loan professional. An expert’s advice can help you make better decisions.