Negative Amortization Loans

(By Peter C. Fyler, Martha's Vineyard Buyer Broker on the web at SplitRockRE.com)



As 2005 draws to a close, Comptroller of the Currency John C. Dugan has singled out negative amortization loans (NAL’s) as a primary concern of the Treasury Department; they may not be as readily available in 2006.

Negative Amortization loans are also known as payment-option loans, and therein lies the problem. In order to afford the loan the mortgagor will need to make reduced payments. The amount of the loan subsequently increases due to a build-up in principle and interest caused by the low monthly payments. Theoretically, what protects the mortgagor is the assumption that a property purchased today will appreciate significantly within the life of the loan, say 5 years, and the loan will not out pace the value of the property. At the end of the term the payment plan adjusts and if the mortgagor cannot refinance the mortgage, the “payment shock” could be devastating as the loan payment amount could potentially double.

Why was this product created? One reason is to allow people to purchase properties in high-cost areas, like Martha’s Vineyard or California where they would need to assume huge mortgages. Although there is very little one can invest in that will realize a better return than real estate because of the low interest rates and high property appreciation percentages, negative amortization loans can still be a trap even for the more sophisticated borrower. Who are the best candidates for negative amortization loans? Borrowers with impeccable credit backgrounds and solid incomes who are able to make a substantial downpayment are subject to the least risk.

On Martha’s Vineyard we have experienced a very healthy run during the last 5 years and some say we have hit the wall. Prices have consistently increased, although not at the hysterical rate they did during the 1980’s. I still believe our market is alive and well and real estate appreciation will remain steady despite a slight adjustment in the current market. The Vineyard is one of those special and unique destinations that remain widely popular both nationally and internationally. Given the right property in the right location at the right price, the chances are pretty good that your investment will remain safe despite bumps in the economic road.

For more information on buying or investing in Martha's Vineyard Real Estate, please visit our informative web site at SplitRockRE.com.