Negative amortization in Key West Loan

In a typical Key West real estate home loan, the borrower pays off the interest and principal in installments. This is known as amortization because the debt is gradually reduced.

Negative amortization can occur when the installment payments do not cover all the interest due each month. This unpaid interest is added on to the principal that is owed, resulting in a debt that increases, rather than decreases.

The worst problem with negative amortization occurs in a real estate market in which home values decrease. Then the size of your debt could increase to the point where it would exceed the equity in your real estate. Sadly, you could sell your home and not be able to repay what you owe.

Most professionals advise buyers to avoid a negatively amortized loan. The risks outweigh the benefits of the lower payments. It may be better to postpone buying a home until you can make higher payments or investigate a lower-cost loan from the FHA or VA.