Negative Amortization Schedule
- When mortgage or loan payments are in excess of the interest due, it is a normal amortization schedule. The balance owing decreases after every payment.
- When mortgage or loan payments are exactly equal to the interest due, it is called an interest only schedule. The balance owing remains the same after each payment.
- When mortgage or loan payments are less than the interest due, it is called a negative amortization schedule. The balance owing increases after each payment, because the missing interest is added to the balance.
- When mortgage or loan payments are set to zero in the MORTGAGE2 PRO amortization schedule the schedule becomes an expanded Present Value Future Value grid.
A negative amortization schedule
What if a lender offered you a $150,000 loan (or mortgage) at 6% for 30 years and told you the monthly payments would be $600 per month. This may sound like a sweet deal but be cautious! If you had an amortization schedule you notice that the blended monthly payments for 30 years would have to be $899.33 in order to retire the loan.
In fact if you only paid $600 per month the loan would never be paid off. The balance owing would continue to increase with time because it is a negative amortization schedule. In fact some lenders have been known to entice new borrowers with a variation of this technique.
Offer the borrowers $600 per month for the first year then switch them to the regular payments of $899.93
After 30 years of payments,… surprise surprise … you still owe a balance of $20,941.65