| There are 3 main categories of loans: Conventional, | | | | interest-only loan to another in a process known as |
| Interest-Only, and Negative Amortization. The distinction | | | | serial refinancing. This practice was very common |
| between these loans is how the amount of principal is | | | | during the Great Housing Bubble, and there was an |
| impacted by monthly payments. Conventional loans | | | | expectation that this process could go on indefinitely. |
| pay off the debt, interest only loans neither increases | | | | The Negative Amortization loan is one in which the full |
| or decreases the debt, and negative amortization loans | | | | amount interest is not paid with each payment, and the |
| add to the debt. | | | | unpaid interest gets added to the principal balance. |
| A Conventional mortgage includes some amount of | | | | Each month, the borrower is increasing the debt. |
| principal in the payment in order to repay the original | | | | These loans are inherently unstable, and most who |
| loan amount. The greater the amount of principal | | | | used them ended up in foreclosure. This is the most |
| repaid, the quicker the loan is paid off. This kind of | | | | toxic form of financing imaginable. The high default |
| mortgage has an amortization schedule that | | | | rates and extreme default losses caused this loan |
| determines how fast the loan is paid back. A 30-year | | | | program to disappear. |
| term is the most common, but a 15-year term is | | | | Two of the features of all Interest-Only or Negative |
| popular with more conservative borrowers. The main | | | | Amortization loans are an interest rate reset and a |
| advantage of a conventional mortgage is the fixed | | | | payment recast. All these loans have provisions where |
| payment that does not change for the life of the loan. | | | | the interest rate changes or loan balance comes due |
| An Interest-Only loan does just what it describes; it | | | | either in the form of a balloon payment or an |
| only pays the interest. This loan does not pay back | | | | accelerated amortization schedule. In any case, |
| any of the principal, but it at least "treads water" and | | | | borrowers often must refinance or face a major |
| does not fall behind. At some point, an interest-only | | | | increase in their monthly loan payment. This increase in |
| loan converts to a conventionally amortized loan and | | | | payment is what makes these loans such a problem. |
| the balance is repaid. Many people refinance from one | | | | |