What is Negative Amortization?
Negative amortization occurs when a mortgage payment is less than the interest due, causing the unpaid interest to be added to the loan balance.
Negative amortization happens when your scheduled payment does not cover the interest owed, so the shortfall is added to your principal. This can occur with certain payment-option adjustable-rate mortgages. Borrowers might meet it if they choose a minimum payment that is lower than the fully amortizing amount. The result is a growing loan balance and potentially higher payments later. Watch for loan terms that allow negative amortization, and note that it can lead to owing more than you originally borrowed. Most modern mortgages do not permit it, but it is important to read your note carefully and ask about any payment options that could increase your balance.
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