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When buying a property, a loan from the mortgage broker or local bank is often needed by the purchaser to purchase the property. There are two mainstream types of loans (with different variations of each); fixed-rate loans and adjustable-rate loans (from this point forward referred to as ARMs). The paragraphs below outline the dangerous possibility of negative amortization when using an ARM to finance a real estate purchase.

Bad Credit Credit Creditres An ARM is a mortgage that has an interest rate that adjusts periodically, often every six or 12 months. At these intervals, the interest rate is compared to a variable, often the interest paid on 30-year Treasury Notes (there are many benefits and disadvantages to using an ARM which are outside the scope of this article). With the basic understanding of an ARM cleared up, it is time proceed to the primary purpose of this article; negative amortization.

Cap (payment rate) The maximum payment amount increase allowable on an adjustable rate mortgage. May result in negative amortization. See Negative amortization. Certificate Of Title A statement that shows ownership of property, stating that the seller has clear legal title. Closing The concluding day of the real estate transaction, when title and deed pass from seller to buyer, the buyer signs the mortgage and pays the purchase price and closing costs.

Bad Consolidation Credit Debt On a normal 30-year fixed loan the loan balance is gradually reduced as one makes monthly mortgage payments. This process of lowering the loan balance over time is called amortization. This same process also happens with ARMs with one major difference. The ARM has the potential to reverse the amortization process, thus adding to the loan balance and the amount that one owes on the loan. This is called negative amortization and it can literally destroy ones credit, lead to bankruptcy, and cast financial doom on the buyer for years to come. Here's how it happens:

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Bad Company Credit Repair 1.) The ARM has a cap on the increase of the monthly payment that one can pay, $500.00 for example. $50.00 of that loan is principle and $450.00 is the interest. This means that no matter how high interest rates fluctuate, the loan's owner does not have to pay more than $500.00 a month.

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Bad Card Credit Credit 2.) The ARM does NOT have a cap on the monthly interest rate increase. For example, if the monthly loan payment is $500.00 as mentioned above, then the monthly payment is "capped-out" and can go no higher. But now the time comes for the loan's interest rate to be evaluated and rates have went up 1% since the last rate evaluation.

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Property market collapse, credit crunch You know things are bad when property developers can give their cash away.

Bad Credit Loan Mortgage Since the loan payment is already the highest it can go per month at $500.00, the latest rate increase of 1% is not reflected in the monthly payment. This means that every month the 1% interest will be added onto the balance of the loan. So every month when one pays the $500.00 mortgage, instead of the amortization process taking place to lessen the loan balance, the opposite is happening. The negative amortization process is taking place, adding the 1% interest to the loan amount every month and increasing the loan's balance.

Auto Bad Credit Loan To sum things up, the above process results in a situation that mirrors credit card debt. The $500.00 monthly mortgage has turned into a monthly minimum payment resembling a credit card's monthly minimum payment. Everyone knows what happens when they pay the monthly minimum credit card payment every month; financial destruction.

Bad Credit Mortgage Refinance With the real estate bubble rivaling the tech bubble in all-time speculative greatness, be careful to avoid the silent-but-deadly financial killer of negative amortization!

Bad Credit Refinance The author is the founder and owner of LandLordDocuments.com

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