In the negative amortization loan system, the periodic payment doesn’t include the interest amount due for that period of loan. The result of this type of loan is that the principal or loan balance gets higher by the unpaid interest amount. This scheme makes the payment flexible.
There is also a recast period and a recast principal balance cap in the Negative amortization where the recast period can stretch to 60 months i.e. 5 years. The recast principal balance cap which is also known as the NegAm limit is generally upto 125% increase of the loan balance against the actual loan amount. A Negative Amortization mortgage is where the principal keeps on increasing through out the early stages of the mortgage process. During this time period, the borrower can make partial payments. The pending payment adds up to the amount that is owed on the mortgage by the borrower. With the end of the period, the borrower needs to pay off the additional amount with the original principal.
However, it can be pointed out that the Negative amortization loans can involve high risks for the investors who are inexperienced. In the falling market, these loans are after unlike the rising market where high risks are involved.
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