A negative amortization loan is an adjustable rate mortgage that allows a consumer to tap into home "equity" by offering several monthly payment options.
This works well for someone that has seasonal income, or for someone that wants more control over their cash flow. However the borrower must have financial discipline. Each month, the borrower will choose to make a fully amortized payment, an interest only payment, or a low introductory rate payment.
A fully amortized payment includes payment towards principal & interest. The interest only payment is lower, but no part of that mortgage payment goes towards the principal.
The third option is where negative amortization comes into play. If the consumer choose to make the low introductory rate payment, the interest is not covered for that month. The balance of interest owed is then tacked back on to the principal, increasing the mortgage debt.
You should have a full understanding of how an adjustable rate mortgage works before you enter into this type of loan. Also note that once the maximum loan amount has been reached, the lender will immediately increase the payment to the fully amortized rate.
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