Neg­a­tive Amor­ti­za­tion

The Washington Post Sunday - - Real Estate -

K A loan fea­ture in which the bor­rower pays back less than the full amount of in­ter­est owed each month. The shorted amount is then added to the loan’s bal­ance. K A bor­row­ing method that is in­tended to add flex­i­bil­ity to a loan and help bor­row­ers stretch their bud­gets to buy houses they could not af­ford with a tra­di­tional, 30year-fixed-rate mort­gage. It keeps pay­ments low in the early years of the loan, on the the­ory that the bor­rower will have more in­come later, the house will have ap­pre­ci­ated, and the owner can re­fi­nance. K A mort­gage fea­ture that’s es­pe­cially com­mon in parts of the coun­try with rel­a­tively high hous­ing costs, such as Cal­i­for­nia and the Wash­ing­ton re­gion. K A sit­u­a­tion that of­ten de­vel­ops when an ad­justable-rate loan’s rate changes more of­ten than its re­quired monthly pay­ment. K A type of mort­gage that’s of­ten ad­ver­tised with very low “teaser” rates, fur­ther ex­ac­er­bat­ing the like­li­hood of pay­ment shock when the in­ter­est rate ad­justs and pay­ments on the now-big­ger loan bal­ance jump con­sid­er­ably. K A pro­vi­sion that can leave home­own­ers up­side down on their loans, even af­ter own­ing a prop­erty for many years. This puts the home­own­ers at a higher risk of de­fault and fore­clo­sure, as they can’t even re­fi­nance their way out of a tem­po­rary fi­nan­cial jam.

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