A 1.25% Negative Amortization (Neg Am) loan, also known as a deferred interest mortgage, can seem attractive due to its low initial payment. However, it's crucial to understand both the benefits and risks before considering it as a home financing option.

What is a 1.25% Neg Am Loan?

A negative amortization loan allows borrowers to make minimum payments that are lower than the actual interest accruing on the loan. The unpaid interest is then added to the principal balance, increasing the loan amount over time.

Potential Benefits:

1. Lower Initial Payments: Borrowers can enjoy reduced monthly payments, freeing up cash flow for other investments or expenses.

2. Flexibility: These loans often offer multiple payment options—minimum payment, interest-only, or fully amortized payment.

3. Short-Term Affordability: Ideal for those expecting a rise in income or planning to refinance or sell before the loan balance grows significantly.

Risks and Considerations:

1. Growing Loan Balance: Deferred interest adds to the loan principal, increasing the total debt.

2. Higher Future Payments: Once the loan resets, monthly payments can spike significantly, potentially causing financial strain.

3. Market Dependency: If property values decline, borrowers may owe more than their home's worth, making refinancing or selling difficult.

Who Might Benefit?

• Investors or homeowners planning short-term ownership.

• Borrowers with fluctuating income but expecting future growth.

• Those confident in rising property values to offset negative amortization.

Final Thoughts

While 1.25% Neg Am loans offer short-term affordability, they require careful planning. If used strategically, they can be a good financing tool, but borrowers must be aware of potential long-term financial impacts. Always consult a financial advisor before choosing this type of mortgage.

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