Could You Be Losing Money on Your Mortgage?

Negative Amortization and Why You Don't Want It

It sounds complicated, but if you own a house or have any kind of loan, negative amortization might be costing you money.

Mrs. Micah's definition of "negative amortization" - each month you owe the mortgage company more money than you did before.

It means that you're not paying enough each month even to cover the loan's interest. You may think, "Well, I'm making my minimum payment. That should be good enough, right?" In theory, that's correct. But with ARMs for example (adjustable rate mortgages), many companies set the minimum payment lower than the month's interest.

For example, suppose that the interest on your loan was $550/month. But your mortgage company set the payment at $450/month. This means that each month, you owe the bank more than you did the month before. And you don't own any of your house.

So the extra interest accrues on the account and you're deeper in debt. Meanwhile, you may think that everything's fine, because you never caught the fine print. Or because you expect your bank not to do this kind of thing to you. Then a few years down the road, your bank raises the rates, to cover the original loan, the interest, and the accrued interest.

One name for such mortgages is "payment option ARMs". So if you have one, think about paying more now (including more of the principle) to avoid accruing a higher balance for later. After all, you'll have to pay it off somehow.

Can this sort of thing still affect you if you don't have a mortgage? Well, consider all the places you owe money-cars, credit cards, other loans.

Now consider how much you simply take your creditors at their word. Maybe you make the minimum payment or tack on a little bit more. Perhaps you haven't gotten to them yet in your repayment plan.

We can't assume that they have our best interests at heart. We can't even assume that we'll notice when they're taking advantage of us. Did your interest rate go up? How well were you notified? Are you about to sign a contract? Read all of it beforehand. Figure out where they might be trying to screw you over.