Negative Amortization

A situation in which the loan principal is actually increasing, instead of decreasing. This usually happens when the payments are less than the amount of the interest due, so that the overdue interest becomes part of the principal balance. Some ARM loans may incur negative amortization, because as caps are factored in, the capped payment is insufficient to cover the interest due. Thus, the unpaid or deferred interest becomes additional principal. For more information, see the "ARM Loans" article in the "Loan Programs" section.

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