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"Negative Amortization causes the loan balance to increase rather than decrease," says Litzner. 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 Litzner.
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 Litzner.
"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," saysLitzner. 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 home ownership, please contact Century 21 American Homes at 800-270-6318.
Century 21 American Homes is one of the fastest growing real estate brokerages serving Long Island, Queens and Brooklyn. To find out more about an exciting career in real estate contact us at careers@c21amhomes.com.
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