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Mrs. Micah and negative amortization (or, what the heck is that?)

It sounds complicated, but if you own a house, negative amortization might be costing you money.

That’s why I looked into it. It can’t cost me money now, but it might someday when I have a mortgage.

Mrs. Micah’s definition of “negative amortization” – each month you owe the mortgage company more money than you did before.

Now this is a broader phrase and applies to other loan contexts, including car loans, but let’s look at how it applies to mortgages.

It means that you’re not paying enough each month even to cover the loan’s interest. You may think, “Well, I’m making my minimum payment. That should be good enough, right?” In theory, that’s correct. But with ARMs for example (adjustable rate mortgages), many companies set the minimum payment lower than the month’s interest.

So the extra interest accrues on the account and you’re deeper in debt. Meanwhile, you may think that everything’s fine, because you never caught the fine print. Or because you expect your bank not to do this kind of thing to you.

One name for such mortgages is “payment option ARMs”. So if you have one, think about paying more now to avoid accruing a higher balance for later. After all, you’ll have to pay it off somehow.

I don’t think ARMs are a good idea at all. But let’s not make this about them today. Instead, consider all the places you owe money-cars, credit cards, other loans.

Now consider how much you simply take your creditors at their word. Maybe make the minimum payment or tack on a little bit more. Perhaps you haven’t gotten to them yet in your snowball.

We can’t assume that they have our best interests at heart. We can’t even assume that we’ll notice when they’re taking advantage of us. Did your interest rate go up? How well were you notified? Are you about to sign a contract? Read all of it beforehand! Figure out where they might be trying to screw you over.

Mr. Micah had a credit card whose rates rose to 29.9%! But he was so stressed by finance that he didn’t notice, look into his card, or call and ask for it to be lowered.

You can’t afford to be passive.

Anybody got related stories to share?

Here are a few sites which might be useful in making sure you’re not at risk for negative amortization:
http://en.wikipedia.org/wiki/Negative_amortization
http://www.investopedia.com/terms/n/negativeamortization.asp
http://www.mtgprofessor.com/A%20-%20Amortization/how_does_negative_amortization_work.htm (dreadful font, it explains the numbers nicely)


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