This is called “negative amortization,” and it cannot continue indefinitely. At some point the loan must start to amortize over its remaining term.

What is another term for negative amortization?

In finance, negative amortization (also known as NegAm, deferred interest or graduated payment mortgage) occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases.

Is negative amortization bad?

Potential borrowers need to understand the ramifications of negative amortization mortgage loans (“Neg Am”), both good and bad. This negatively amortizes a loan; therefore the loan does not become paid in full based on the original terms.

How does negative amortization happen?

Negative amortization happens when you make too small of a payment, which doesn’t cover the interest, and as a result it gets added to the unpaid loan balance. Ultimately, you end up with more debt. This happens as a natural consequence of not being able to pay your loan.

How does negative amortization work on a mortgage?

Negative amortization allows mortgage borrowers to pay reduced mortgage payments at the start of the loan contract. Amortization is a standard process where a borrower pays off a loan with regular loan payments so that the outstanding balance goes down with each payment received.

How is the amortization of a mortgage calculated?

There are different methods used for the calculation of amortization schedule. Amortization table is a chart which helps you to keep track of your monthly payments as per amortization schedule. The last line of the schedule shows the total interest and principal payments for the entire duration of mortgage.

What happens when you only pay some of the amortization?

If you only pay some of the interest, the amount that you do not pay may get added to your principal balance. Then you end up paying not only interest on the money you borrowed, but interest on the interest you are being charged for the money you borrowed.