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Massachusetts Agencies

Negative Amortization Mortgages and Policies

Articles from The Massachusetts Focus

Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Spring 2004, Volume 3, Number 2

Negative Amortization Mortgages and Policies
by Pamela Butler O'Brien, Underwriting Counsel

When the indices used for variable rate mortgages are low, negative amortization mortgages become increasingly popular. The following is a series of frequently asked questions, and their answers, for this unique mortgage product.

What is a Negative Amortization Mortgage?

A negative amortization mortgage is one in which the borrower may end up owing more than the original principal amount borrowed. 

How does this happen?

A negative amortization mortgage is a variable rate mortgage. The rate of interest changes monthly, but the payments are fixed for a year. Therefore, if the interest rate on the day the payment is fixed is 5%, the payments for the next year will be figured with a 5% interest rate. Since the actual rate changes monthly, the rate may go up the next month to 6%, but payments will only be made at a 5% rate, so instead of paying down the mortgage, the debt will actually be increasing. 

Is there a cap?

There is typically a cap. The cap will be provided for in the note and recited in the mortgage itself. The most common caps are 110% and 125% of the original principal amount. If the outstanding balance reaches that amount, the lender will refigure the payments at that time rather than waiting until the year is up. 

What is the amount of insurance to show on the policy?

The lenders will want to be insured for the full amount of their risk, so the amount of the insurance will be the cap. Again, the lender's note and closing instructions will verify the amount. 

What is the premium?

Premium will be based on the amount of the coverage and not the original principal balance. In other words, premium should be based on the amount of the potential liability - the cap amount. 

What endorsement do I use for Negative Amortization Mortgages?

Again read the lender's closing instructions carefully to verify it is expecting what we will be providing. The usual endorsement in a negative amortization mortgage is ALTA 6.2 Endorsement. 

Where do I get the ALTA 6.2 Endorsement?

You may give ALTA 6.2 coverage by simply checking the block on the policy. If you do not have an ALTA 6.2 Endorsement block, you may check "Other" and fill in "ALTA 6.2 Negative Amortization Endorsement." If you need a hard copy you may contact Adina Potischman in the Boston office, or find one on Virtual Underwriter at www.vuwriter.com or on our website at www.stewartma.com.

How does the ALTA 6.2 Endorsement differ from the ALTA 6 Variable Endorsement I am used to?

While both endorsements insure against the invalidity of the insured mortgage lien by reason of provisions for the change in rate of interest, the ALTA 6.2 Endorsement also insures against the invalidity, loss of priority or unenforceability of the lien of the insured mortgage by reason of the charging of interest on interest and the addition of unpaid interest to the principal balance.