AMORTIZATION / PREPAYMENT PENALTIES

Amortization describes the gradual decrease in principal balance as you repay your loan over time.

Negative amortization provides an option of making a lower monthly payment than the actual amortized payment. The difference between the lower payment and the normally amortized payment is added to your principal balance.

If you have a 30-year loan, for example, with a payment of $700 per month, with the interest portion of which is $600 per month, but because of the teaser rate (a negative amortization rate) you are paying only $500 per month, then every month $100 will be added to your loan balance. The smaller payment can give you flexibility if you loose a job, go back to school, etc. Negative amortization loans are most advisable in appreciating housing markets. Once your loan balance reaches 110% of the original amount, your negative amortization option ceases and your minimum payment would increase suddenly and dramatically. In a nut shell, negative amortization means additional interest above your capped monthly payment, is added to your loan balance.

Prepayment Penalty

Loans which include prepayment penalties generally have no points and no fees and are advisable if you plan not to be moving in the first 3 years of your loan. There are also several prepayment provisions in case you pay off the loan. The penalty you pay is only for 80% of the original loan balance. Another provision calls for a 2% penalty during the first 3 years of the loan. Another calls for a 3% prepayment penalty the first year, 2% for the second and 1% for the third, also based on 80% of the original loan balance.