What is a negative amortization home mortgage?

DEAR BOB: Several times you recently mentioned negativeamortization home mortgages. What does that mean? Is it good or bad? –Myron H.

DEAR MYRON: A negative amortization home mortgage is anadjustable-rate mortgage (ARM). The borrower’s monthly payment remains fixedfor a specific time, such as one year, three years, or even longer. Such loanscan be a big help to home buyers because their monthly mortgage payments won’tincrease for the agreed period.

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However, because it is an ARM, the interest rate adjustsperiodically, such as monthly, quarterly, semi-annually or annually. When theinterest rate goes up, but the monthly payment stays fixed, the unpaid interestis added to the mortgage’s principal balance.

In other words, instead of the mortgage balance amortizingover the 30-year mortgage life, the balance amortizes “negatively” byincreasing.

That’s all right if the market value of the home isappreciating. However, if the home’s value doesn’t go up as fast as the”negative am” mortgage balance increases, the homeowner isn’tbuilding any equity. The result is the “negative am” borrower willusually owe more on the mortgage than its original balance.

To answer your second question, I think negativeamortization home loans are bad for most borrowers. However, if the marketvalue of the home appreciates as fast as the “negative am” increasesthe mortgage balance, then it’s not so bad.


DEAR BOB: I enjoyed your recent article about how a homeseller’s cutting the agent’s sales commission can backfire if local buyer’sagents won’t show the reduced commission listing to their prospective buyers.It seems to me buyer’s agents need a greater, not lesser, incentive to sellhomes in a slow buyer’s market. If the local “going rate” for homesales commissions is 6 percent, why shouldn’t the seller insist the listingagent get 2 percent and the buyer’s agent get 4 percent? –Brett D.

DEAR BRETT: That seems like a good suggestion. However, ifthe listing agent will only receive a 2 percent commission, instead of thecustomary 3 percent, that isn’t much incentive for the listing agent to workhard to market that listing.

Fortunately, as home sales prices have risen dramatically inrecent years, the dollar amounts of sales commissions have also grownsubstantially. Although the commission percentages are important to real estateagents, what really matters is the dollars the agents put in their pockets whenlistings sell.


DEAR BOB: Less than a year ago, we bought an older house. Inour accepted purchase offer, we specified the kitchen be brought up to currentcode by installing GFI (ground fault interrupt) outlets. We since discoveredthe GFI plugs were installed, but never properly grounded. Do we have anyrecourse against our buyer’s agent, listing agent, the seller, or the electricfirm hired by the seller? –Jeff DeK.

DEAR JEFF: Your best recourse is against the licensedelectrician who installed the GFI outlets. He should complete the work at nocharge to you. If he refuses to do so, you should report the matter to thestate contractor’s license board for discipline.

If you have to hire another electrician, I would firstobtain a written bid and submit it to the seller for payment in advance. If heor she refuses to pay, I would have the work done and then take the seller tothe local Small Claims Court for compensation.

The new Robert Bruss special report, “Pros and Cons ofToday’s Five Best Real Estate Profit Opportunities,” is now available for$5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2006 Inman News

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