Evergreen Loan Definition and How it Works?

1. What is an Evergreen loan?

An evergreen loan is a type of loan in which the borrower just has to pay interest and not principal. The term evergreen means perpetual so this is also called a non-amortizing mortgage or negative amortization loan. A portion of each payment no matter how small goes towards the principal, and the rest is applied as interest for the term of the loan.

2. How does an evergreen loan work?

Basically, an evergreen loan allows the borrower to make only interest-only payments for a period of years. In most cases, you can choose between a 3 or 5-year period. The main idea behind this is that the house will be paid off in full at some point during those years and then your lender can charge you principal and interest which would be more than if you were paying interest and principal each month.

3. What is the benefit of an evergreen loan?

The main purpose of an evergreen loan is to enable homebuyers who want to buy a house but don’t have the savings needed for the down payment or lack a good credit rating to keep their monthly payments low in the beginning. Once you pay a little bit more each month, your lender will increase your monthly payments, and eventually, you can afford to pay principal and interest which would be less than if you just made interest-only payments.

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4. Drawbacks to an evergreen loan?

The main disadvantage of an evergreen loan is that you won’t be able to pay down your principal and the outstanding amount will just keep growing. Negative amortization causes the total cost of borrowing over time to increase – which means you are paying more interest for longer. The total cost by comparison can be lower if you make regular monthly payments that include principal and interest.

5. What is negative amortization?

Negative amortization occurs when the amount you owe on your loan increases even though you are making payments on it. It means that the outstanding amount of the loan is increasing rather than decreasing. This happens because some or all of each payment you make goes towards interest and none goes to reducing the principal balance on the loan. Negative amortization stops when you begin paying down your mortgage’s principal and the negative amortization is added to your principal balance.

6. Will I pay more for an evergreen loan?

Yes, you will pay more if you take longer to make payments that reduce the principal balance. And you will pay even more if the interest rate goes up during this time (because there won’t be any principal reduction). But it will be less if the interest rate goes down.