Negative Amortization

Negative amortization occurs when monthly payments do not cover the interest cost. This means that the repayment schedule calling for periodic payments is insufficient and the loan cannot be fully amortized. The interest that isn’t covered is added to the unpaid principal balance, which means that even after several payments you could owe more than you did at the beginning of the loan. Eventually, your payments must be rescheduled to fully pay off the debt. Negative amortization can occur when an ARM has a payment cap resulting in monthly payments that aren’t high enough to cover the interest.

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