I can think of three reasons for that. One of them or any combination of them could result in such an illogical at first glance situation:
• You made an extra payment towards the principal some time ago and now it’s taking effect. The balance has become so low, that even a higher rate cannot push the actual sum of the monthly payment to its previous margin.
• The PMI got cancelled by the lender. Under the provision of the 1999 Federal law, lenders are required to cancel private mortgage insurance on most home mortgage loans made after July 29, 1999 automatically when amortization has reduced the loan balance to 78% of the value of the property at the time the loan was made. An earlier cancellation at 80% of the property’s value is likely to happen only if initiated by the borrower himself.
• If the rate has increased, but the amount of your monthly payment remained unchanged or went up insignificantly and then froze at that level, you may be in trouble, because these are the symptoms of a monthly payment cap in action. Check your mortgage contract: Is your mortgage an adjustable rate mortgage? Does it carry a payment cap? If this is the case, you should immediately look for ways to avoid negative amortization, and fast, before it increases the outstanding balance of your mortgage and wastes a lot of the effort you have put into paying the debt off.

This very unpleasant situation is called negative amortization. The most likely causes are:
i) You have an adjustable rate mortgage with a payment cap that does not allow you to raise your monthly payment enough to match the new interest rate. As a result, your monthly payment is probably high enough to cover the principal part and some of the interest, but all the underpaid interest is added to the outstanding balance. The situation calls for emergency action!!!
ii) You have an option adjustable rate mortgage and you stick to the minimum payment option, even though the rate has changed. If you have ignored the raised rate for 2 years you are in big trouble, because most option ARMs carry a 7.5% a year minimum payment cap. Under such a limitation it is very problematic to catch up with the new rate and the debt it has already produced. The only way out of this is selecting some other option for your monthly payments immediately; otherwise negative amortization can increase your debt to a virtually unpayable amount.

Once I googled for Option ARM and the top search result read Nightmare Mortgages. Very … hmmm … intriguing, isn’t it?

Well, as I always say, you have to have a clear idea of how a mortgage plan works. Once you are sure, that you understand it, you can decide for yourself, whether such an Option is likely to become your nightmare.

The Option Adjustable Rate Mortgage offers the borrower several options for each monthly payment. The mortgage contract states what exactly variants are possible. The first one or two months, depending on the contract, the borrower is entitled to a very low interest rate and a very low period payment amount. When this introductory period expires, the rate goes up and each period payment is paid according to the selected option. The usual available options are: a minimum payment, or an interest-only on a 30-year mortgage payment, or a fully amortizing 30-year mortgage payment, or a fully amortizing 15-year mortgage payment. That means that one month you can pay only the interest and the next monthly payment may equal to a monthly payment of a 30-year Adjustable Rate Mortgage with your balance and the rate of the day. If you choose the minimum payment option, which is a really low amount - just imagine what you can do with the “saved” money!!! Where’s the nightmare, you say? Well, it is already there, but it is not obvious yet, that’s why a lot of people make a mistake and agree to these terms without reading the fine print thoroughly. The word “saved” is in quotes only when you read it, not when you hear the broker say it… Read the rest of this article »