A Beginner's Guide to Negative Amortization vs. Reverse Mortgages
Gabriel TraversoLoanBiz Columnist
Many homebuyers get mixed up about negative amortization
and reverse mortgages. Learning the differences between the two can help you
make your decision when you refinance your home.
The Negative Amortization Mortgage
Negative amortization is a method in which the borrower pays
back less than the full amount of interest on the mortgage loan every month.
The amount not paid is then added to the total amount of the mortgage. The
purpose of the negative amortization is to increase affordability or add
payment savings for the homeowner. All negative amortization agreements do
still require that the full amount of the mortgage -- principal and interest --
is eventually repaid, so it should ideally be used as a short-term solution.
Reverse Mortgages
Reverse Mortgages are only available to senior citizens age
62 and older in the United States. It releases some of the equity on the mortgage
in one lump sum. The obligation to repay this amount is deferred pending the
death of the borrower, sale of the home or moving. In a reverse mortgage, the
homeowner makes no payments on the loan whatsoever; instead it is added to the
final amount of the mortgage balance. If the home owner dies, the family is
required to sell the property and repay the loan unless otherwise stipulated in
the agreement.
What’s the Difference
and Which is Best for Me?
Choosing between negative amortization and a reverse
mortgage usually starts with the age requirements. If you are under 62,
negative amortization is probably your only option. It also depends on your
goals. If you can still afford to make smaller payments to your mortgage, then
a negative amortization mortgage is the way to go. But if you need a large sum
of money now then a reverse mortgage may be your best fit. Whatever your
situation may be, have an in depth conversation with your mortgage lender to
research all your possibilities.
About the Author
Gabriel Traverso is a freelance writer, professional musician, and artist. He resides with his family in Reno, NV.
