Chapter 2 Blog

https://www.amazines.com/article_detail.cfm?articleid=555476

Summary:

This article explains negative amortization and how it works. It is a great way for new and upcoming house owners to pay the mortgage on their houses because it offers several flexible options of payment. Considerations made by many homebuyers are to get a fixed loan with a clause which has negative amortization for the earlier years of the loan. With these types of loans are usually called graduate payment mortgages (GPM’s). In the conventional plan, the borrowers’ payment is consisted of two parts, the amount paid on top of the interest of the loan and the amount applied to the principal. A negative amortization clause gives the borrowers’ the ability to pay a fixed amount, interest only, or an accrued interest. Also, you would pay more interest in the beginning than your actual principle of your loan in order to pay less interest in the future which can add up. Banks offer these buyers larger loans because they are taking a bigger risk investing in the market for a much longer period of time.

Connections:

My connections in regards of this topic to Chapter 2 of the textbook are quite simple. Well, we have learned about amortization and how it works when you are talking about supplies and equipment of a company but not in a situation that we could easily picture in our future. By the way, if you did not know already, amortization is the decrease in value of an item owned by a company due to time, technical problems, or simple wear-and-tear. With negative amortization, purchasing a house can become much easier when given the chance to make your interest payments sooner. Lenders’ usually offer a wide variety of payment options, allowing you to pay a certain minimum but can still pay a large sum if you have the money right there and then. These sort of deals really attract business owners and homebuyers because they have a choice with their spending instead of being pressured into a deal.

Personal Reflection:

My personal reflection involved understanding exactly how negative amortization works and where it is applied in peoples’ daily lives. I found that it is quite a good method of paying for your house, especially for new buyers who are all around us. They are given the opportunity to take a long period of time to pay off their debt. Along with this, being able to pay more of your interest sooner can really save you money in the future because your principal amount will not change but your interest can increase dramatically. New families and couples can find this wonderful because they are also allowed a long list of payment options which can work with most family situations. Another benefit is receiving larger loans from banks because when showing that you are committed to this kind of thing, it can sway their decisions in a heartbeat which can aid you in the future. One final note, this can also help with retirement as interest is not building up over all this time but instead is being paid off mostly at the start. I cannot find a major factor that would change my decision of signing my own negative amortization clause in the future.

-Jason K.