Negative Amortization Warning MarketWatch has a great article on pitfalls to avoid with negative amortization loans. It discusses terms, interest rate adjustment and other pitfall issues. One important point buried deep in the article. "If you do need to refinance an interest-only or negative-amortization mortgage, you could find yourself owing too much to qualify for a new loan." That's an important thing to remember. Too many people but too much house with the expectation that the house is going to rise in value. As my post Median Home Price in California illustrated, the housing inventory is rising along with a slightly longer time to sell. All of this while interest rates are significantly lower than they were last year. Remember real estate doesn't alway raise in value. Here are the biggest pitfalls noted in the article.

• Does a mortgage have a longer term than the typical 30 years? Despite attractively lower monthly payments, expect to pay more interest over time than you would with a traditional 30-year term.
  
• If an adjustable-rate mortgage has an unusually low teaser rate, your rate could rise even if interest rates drop. In one ad we saw, the 1% advertised rate was effective for exactly one month.
  
• The more frequent the interest-rate adjustment, the faster interest may accumulate if rates rise.
  
• Make certain your lender defines the lifetime rate cap on an adjustable rate mortgage. Is it 5 percentage points over the initial start rate or 5 percentage points over the initial note rate (the mortgage's fully-indexed rate)? Those two lifetime rate caps can be significantly different. Lenders may set lifetime interest-rate caps either way. There also may be a flat-rate lifetime cap, i.e. 10%.
  
• Be certain the mortgage has no prepayment penalty if you expect to refinance.
  
• Don't think it will be easier to qualify for a mortgage just because it has a lower start rate. Lenders set their own qualification standards. It may, for example, be that you must qualify at a higher, fully indexed rate.
  
• "Piggyback loans," or mortgages paired with home-equity loans, typically permit interest-only payments for five or 10 years. After that period, the loan becomes fully amortized -- often for less than the standard 30-year term. So payments on the home-equity-credit-line part of a loan alone can increase dramatically.
  
• Be sure to check mortgages for a trigger that could recast your entire loan. The trigger might be a period, say the end of five years. Or it might be a function of how much negative amortization you have. Example: It could recast if you owe 110% of your loan balance. When this happens, monthly payments could increase
  

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