Negative Amortization Loans

If you are looking to save money on your monthly mortgage payments, one option is an interest-only mortgage loan. With an interest-only mortgage loan you make monthly payments towards the interest on the loan, while making zero payment toward the actual principal. Depending on the amount of the loan and on the interest rate, this type of loan can save you, on a monthly basis, anywhere from $200 to $400. Such savings can come in very handy and allow a marginal borrower to qualify for a home he or she might not have otherwise been able.

There are some traps to watch out for, however, when you are considering an interest-only mortgage loan. One of the traps involves lenders who advertise extremely low monthly payments on interest-only loans.

Often these loans with extremely low payments either are negative-amortizations loans or have the possibility of becoming negative-amortization loans if interest rates change. A negative-amortization loan is a loan that, while it does not only pay down the principal, it also allows the principal owed to actually increase over the lifetime of the loan.

Unless you are a real gambler, or unless you have an investment strategy that will allow you to invest the money that you are saving each month and make a substantial return, loans of this nature should be avoided by the majority of borrowers, especially if you are taking out an interest-only loan because your income, from the very beginning, starts out low.

If you find a loan officer who seems to be offering you a loan that is too good to be true, it very well might be and you need to ask some pretty tough and direct questions before agreeing to a loan with the possibility of a negative-amortization.