Re: Negative Amortization - Posted by phil fernandez
Posted by phil fernandez on February 28, 2001 at 11:11:26:
What you suggest is a possibility, but all of the variables are going to have to be lined up with the stars sorta speak.
First off you and I have no idea about what future appreciation will be. Property values could certainly flatten out or even decline some. How do I know this can happen. I’ve been through about three cycles of this starting way back in the 70’s.
Can you use the extra cashflow to invest in an instrument that will give you a higher rate. Possibly, but again that’s not a given either.
Let me give you a hypothetical example. $90,000 negative amortization mortgage on a house worth $100,000. Property goes down 10% in the next year. It is now worth $90,000. In the meantime your mortgage has grown from $90,000 to $95,000. Now you are upside down to the tune of $5,000.
Even if your invested dollars did well and you made a $5,000 profit at the end of that year where are you now. Back to zero.
That negative amortization mortgage that you took out is just too risky with all of the possible variables and the fact that we really can’t see into the future.
At least that’s my take on it.