"no-neg" ARM vs "neg-am" ARM????

Question

I would like for people with experience to explain the difference between these two, and give an example of when it's best to use one over the other when getting a loan. Thanks.

Bob Rowe · Answer

@Tim Johnson  ---   The overwhelming response from regulators, consumer protection agencies, etc... is harmful to unwitting consumers.    These are sophisticated loans that unless fully understood can be very harmful individually.

Tim Johnson · Answer

@Bob Rowe - why would you consider these forms of lending, "bad  lending" ? Is it harmful to the lender or investor.

Bob Rowe · Answer

@Tim Johnson - Its highly unlikely that you will ever see these resurrected from the "bad lending" idea grave yard...

Stephanie Medellin · Answer

@Tim Johnson  Negative amortzation or neg-am is when you have a low initial payment that doesn't fully cover the interest owed each month.  That unpaid interest gets tacked onto the loan balance.  After a number of years, the loan resets and all of that unpaid interest that was added to your balance is now amortized over the number of years remaining on the loan.   I wouldn't worry too much about negative amortization loans - I have not seen them being offered anywhere lately.  The only reason it may have been good to use these loans in the past is if you were planning to sell right away.  They were also referred to as "pay option ARMs" because you had a choice of three payments:  the low payment with negative amortization, the interest only payment that covered all the interest for the month, or the full principal and interest payment.  You always have the option to pay more than the minimum.

Kerry Baird · Answer

Negative amortization occurs when the payment of principle and interest does not result in the reduction of the amount owed.  Your payments are very low during the early period and the amount owed increases.  Once the mortgage adjusts, the monthly payment goes up and ostensibly begins to amortize, or pay down the balance.

While I may enjoy inflation adjusted debt destruction, I do not like the idea of owing more than I started with.  Your situation may be very different.  You could optimize cash flow for a season, using these loans.  Perhaps that cash flow situation enables you to buy a few more properties than you could otherwise.