Negative Amortization - NegAm - Mortgage Terminology

Mortgage Terminology

• Cap

Percentage rate of change in the NegAm payment. Each year, the minimum payment due rises. Most minimum payments today rise at 7.5%. Considering that raising a rate 1% on a mortgage at 5% is a 20% increase, the NegAm can grow quickly in a rising market. Typically after the 5th year, the loan is recast to an adjustable loan due in 25 years. This is for a 30 year loan term. Newer payment option loans often offer a 40 year term with a higher underlying interest rate.

• Life cap

The maximum interest rate allowed after recast according to the terms of the note. Generally most NegAm loans in the last 5 years have a life cap of 9.95%. Today many of these loans are capped at 12% or above.

• Index

The variable, such as the COFI; COSI; CODI or often MTA, which determines the adjustment as an increase or decrease in the interest rate. Other examples include the LIBOR and TREASURY.

• Margin

Often disclosed in the adjustable rate rider of a Deed of Trust, the margin is determined by the lender and is used to calculate the interest rate. Often the loan originator can increase the margin when structuring the product for the borrower. An increase to the margin will also increase the borrower's interest rate, but will improve the yield spread premium which the loan originator may receive as compensation from the lender.

• Fully indexed rate (F.I.R.)

The fully indexed rate is the sum of the margin and the current index value at the time of adjustment. The F.I.R. is the "interest rate" and determines the interest only, 30 year and 15 year amortized payments. Most adjustable rate products have caps on rate adjustments. If the note provides for a single adjustment not to exceed an increase by more than 1.5, and the variable index, for example, increased by 2.5 since the last adjustment, the fully indexed rate will top out at a maximum adjustment of 1.5, as stated in the note, for that particular adjustment period. Often the F.I.R. is used to determine the debt to income ratio when qualifying a borrower for this loan product.

• Payment options

There are typically 4 payment options (listed from highest to lowest):

• 15 year payment

  • • Amortized over a period of 15 years at the F.I.R.
  • 30 year payment
    • Amortized over a period of 30 years at the F.I.R.
  • Interest only payment
    • F.I.R. times the principal balance, divided by 12 months (with no amortization or reduction in the owed balance).
  • Minimum payment
    • Based on the minimal start rate determined by the lender. When paying the minimum payment, the difference between the interest only payment and the minimum payment is deferred to the balance of the loan increasing what is owed on the mortgage.
• Period

How often the NegAm payment changes. Typically, the minimum payment rises once every twelve months in these types of loans. Usually the rate of rise is 7.5%. The F.I.R. is subject to adjusting with the variable Index, most often on a monthly basis, depending on the product.

• Recast

Premature stop of NegAm. Should the balance increase to a predetermined amount (from 110% up to 125% of the original balance per federal or state regulations) the loan will be "recast" with one of two payment options: the fully amortized principal and interest payment, or if the maximum balance has been reached before the fifth year, an interest only payment until the loan has matured to the recast date (typically 5 years).

• Stop

End of NegAm payment schedule.