Tuesday, June 22, 2004
Federal Reserve Bank of Minneapolis, You're Busted!
If you can't trust the Federal Reserve Banks, well, then who can you trust?
Here's a bit from the glossary of the Federal Reserve Bank of Minneapolis:
negative amortization:
Nope.
The Fed gets it exactly backwards.
Negative amortization occurs when there's an artificial contractual limitation on the increase in payments, not the interest rate.
Sheesh, do I gotta do everything around here?
Anyway, it pays to know this term; it's something a lot of you guys who bought houses you couldn't afford on adjustable rate mortgages (with interest rates near multi-decade lows) are going to find out over the next couple of years.
Financial Tip to Military Families:
You can avoid a negative amortization problem by favoring fixed rate rather than adjustable mortgages. If you must go with an adjustable, save some more down payment money and get a fixed. If you still must go with an adjustable mortgage, then strive to cap the rate increases, rather than the payment increase if you can.
In the long run, it will work out to the same thing, but you won't run into the nightmare scenario where you keep making those house payments and yet your unpaid balance keeps getting larger and larger.
And don't rely on price appreciation to bail you out. Not now.
Splash, out
Jason
Here's a bit from the glossary of the Federal Reserve Bank of Minneapolis:
negative amortization:
An increase in the principal of a loan, when the loan payments are insufficient to pay the interest due. The unpaid interest is added to the outstanding loan balance causing the principal to increase rather than decrease as payments are made. This situation typically occurs in an adjustable mortgage with an annual cap limiting any increases in the interest rate, and also in a graduated payment mortgage, which has low initial payments so moderate-income borrowers can afford to make the loan payments.
Nope.
The Fed gets it exactly backwards.
Negative amortization occurs when there's an artificial contractual limitation on the increase in payments, not the interest rate.
Sheesh, do I gotta do everything around here?
Anyway, it pays to know this term; it's something a lot of you guys who bought houses you couldn't afford on adjustable rate mortgages (with interest rates near multi-decade lows) are going to find out over the next couple of years.
Financial Tip to Military Families:
You can avoid a negative amortization problem by favoring fixed rate rather than adjustable mortgages. If you must go with an adjustable, save some more down payment money and get a fixed. If you still must go with an adjustable mortgage, then strive to cap the rate increases, rather than the payment increase if you can.
In the long run, it will work out to the same thing, but you won't run into the nightmare scenario where you keep making those house payments and yet your unpaid balance keeps getting larger and larger.
And don't rely on price appreciation to bail you out. Not now.
Splash, out
Jason
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