Difference Between Negative Amortization and A Reverse Mortgage
A negative amortization mortgage should not be confused with a reverse mortgage. A negative amortization mortgage is a mortgage where the principal increases throughout the early stage of the mortgage. This early stage is known as the negative amortization or NegAm period. During this time period the borrower is, in effect, making partial payments toward his mortgage. The remainder of his payment, which he is not paying, is added on to the amount owed on the mortgage. Naturally, when this period ends, he must start to pay this additional amount off, along with his original principal.
A reverse mortgage happens when a homeowner, usually a retired person, sells some or all of his equity in his home and retains the right to live there. No payments are due until the homeowner sells the house, moves out of the house, or dies. However, all the interest charged on the loan is applied back to the principal, since no interest payments are made during the life of the loan.
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