Negative Amortization – Its exactly that!

When you make payments on a Real Estate Contract based on a schedule, such as a 30 year amortization, a portion of your payment will go toward principal and a portion toward interest. This is known as a P&I payment. In addition to your P&I payment, most times  you will add 1/12 of the annual tax bill and 1/12 of the annual hazard insurance premium to the monthly P&I payment. These 4 items will comprise your monthly payment obligation to the seller, which is paid through Escrow.  Where Negative Amortization becomes a factor, is when you have selected to pay the seller a lower payment than is due according to the Amortization Schedules P&I payment. For example, if your monthly P&I payment according to the Amortization schedule is $1200.00 and you have contracted to pay the seller $1000.00, your Real Estate Contract will begin to amortize negatively. To make this example as easy to understand, and not have to go into a discussion about up front interest and interest in a rears, you will be $200.00 in the negative. This negative balance will either be added back on to balance owed the seller and accrue interest, or it will be added to the payoff of your Real Estate Contract with out interest accrual. If you do this for 4 years, you could owe an additional $9,600.00 to the seller (+ interest if applicable).