Negative Amortization on Reverse Mortgages

What the heck is negative amortization?

Answer:

Amortization means paying off a loan with regular installments, so the amount you owe goes down with each and every payment. Negative amortization means that even when you pay, the total amount you owe will still increase since you are not paying enough to pay the interest.

Your loan provider may offer the option to make a minimum payment which does not cover the interest you owe. The outstanding interest gets added onto the amount you borrowed, and the balance that you owe will increase.

Typically, after a period of time, you’ll have to begin to make payments to cover principal and interest. These payments will be larger. A negative amortization loan can be risky because you can wind up owing more on your house loan than your house is appraised for. Which makes it more difficult to sell your property because the sales price will not be enough to pay what you owe. This can place you at risk to foreclosure if you run into difficulties making your mortgage payments.

TIP:

Try to avoid paying interest on interest.

Specific loans have payment options that allow you to pay only a portion of the amount of interest you owe each month. When you pay only some of the interest, the amount you do not pay may get added onto your principal balance. You then end up paying not just interest on the money you borrowed, but interest on the interest you are being charged for the money you borrowed. This dramatically increases the amount of debt you have and the cost of the loan. To keep your debt from growing, try to pay down all of the interest and at least some of the principal you owe.