What is reverse amortization?
Reverse amortization - also called negative amortization in lending - is a concept where the amortization of the loan works back. On a normal loan such as a mortgage, debtors must repay the specific amount of principal every month plus interest. Interest starts relatively high on these loans, often several hundred dollars compared to only hundreds of dollars of repayment of principal. Reverse amortization fees lower interest at the beginning of the loan and then goes higher because the debtor makes payments. A very common loan that works in this way is a mortgage with an adjustable rate, although some types of reverse mortgages can also work as well.
The purpose of reverse amortization is to get low timely payments, allowing them to provide a loan easier. As the loan proceeds, the debtor probably expects to increase revenue to compensate for growing payments and interest. For example, business loans can work in this Manner using balloon payments. Initial payments are low for new businesses because these companiesIn general, they do not have sufficient cash flow for large loans. After three to five years, a large balloon payment appears, with a large piece of this payment aimed at interest, replacing low payments in the first years of loans.
Mortgages for home housing are another type of loan where reverse amortization prevails. Here the mortgages can go through the name adjustable mortgage rate (ARM), , which means that the loan begins with a low interest rate and then increases at the specified intervals. For example, the 5/1 arm suggests a potential annual percentage increase in the loan interest rate after five years. This mortgage loan results in reverse amortization, because interest rates almost always increase, which will improve the loan. Weapons are also dangerous loans because payments are increased by debtors may not be able to keep up.
Most creditors provide some type of amortization chart or other schedule to make inYS explained the effects of reverse amortization. A certain understanding is necessary, as these loans may end much more expensive than traditional loans, which provides lower payments at the beginning of the credit period. In addition, information is necessary for individuals who do not plan a loan throughout the loan. Debtors may seem to use reverse amortization by repaying a loan or selling real estate in the initial arm period. In principle, it is a technique of saving money in lending money from creditors.