Negative Limit

The negative limit is the maximum amount of negative amortization which can accure on your loan. Limits vary per lender and can range from 110% to as high as 125%. Some lenders may base their negative limit on the loan-to-value (the loan to value is the loan amount divided by the lessor of the sales price [if a purchase transaction} or appraised value) of the loan. For example, Downey Savings will allow negative amortization to accure up to 115% if the loan-to-value is 75% or less. However, if the loan-to-value exceeds 75%, the negative limit is reduced to 110%.

Here are a few examples of how the negative limit is calculated:

Loan Amount / 110% negative limit / 115% negative limit
$200,000 $220,000 ($200,000 x 1.10) $230,000 ($200,000 x 1.15)
$350,000 $385,000 ($350,000 x 1.10) $402,500 ($350,000 x 1.15)
$600,000 $660,000 ($600,000 x 1.10) $690,000 ($690,000 x 1.15)

Of course, if the negative limit is 125%, the base loan amount would be multiplied by 1.25. The negative amortization on a $200,000 loan would be $250,000.

As you can see, as loan amounts increase, the negative amortization can be significant. Keep in mind that the higher your negative amortization limit, the longer it will take to hit the limit and possibly recast your payment (see annual payment cap post). However, the downside to that, is the higher your negative amortization, when your payment is possibly recast, the amount of increase to your payment may be significantly larger.

Shop for a loan with the least amount of negative amortization. Your payment may be recast sooner, but you will save money in the long run.