Deferred Interest

AAA

DEFINITION of 'Deferred Interest'

The amount of interest that is added to the principal balance of a loan when the contractual terms of that loan allow for a scheduled payment to be made that is less than the interest due. When a loan's principal balance increases because of deferred interest, it is known as negative amortization.

INVESTOPEDIA EXPLAINS 'Deferred Interest'

For example, if the periodic interest payment on a loan is $500 and a $400 payment may be made contractually, $100 is added to the principal balance of the loan.

Adjustable-rate mortgages with a deferrable interest feature are typically known as payment option ARMs. Fixed-rate mortgages with a deferrable interest feature are typically known as graduated-payment mortgages. While these mortgages can provide borrowers with the ability to make low monthly payments, they carry the risk that the monthly payments must increase substantially at some point over the term of the mortgage.

RELATED TERMS
  1. Negative Amortization Limit

    A provision in certain loan contracts that limits the amount ...
  2. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  3. Negative Amortization

    An increase in the principal balance of a loan caused by making ...
  4. Graduated Payment Mortgage

    A type of fixed-rate mortgage in which the payment increases ...
  5. Payment Shock

    The risk that a loan's scheduled future periodic payments may ...
  6. Unscheduled Recast

    The unscheduled recalculation of the remaining amortization schedule ...
Related Articles
  1. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  2. Home & Auto

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
  3. Home & Auto

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  4. Credit & Loans

    What is the key to finding your ideal mortgage?

    Learn what steps you need to take in order to locate the perfect mortgage for your budget, lifestyle and long-term financial goals.
  5. Home & Auto

    Where are home values falling the fastest in the US, and why?

    Learn about the metropolitan areas in the United States experiencing the largest drops in median single family homes values in 2014 and the reasons behind it.
  6. FHA mortgages offer flexibility and low down payments, though they're often pricier than traditional loans backed by private mortgage insurance.
    Credit & Loans

    Before You Choose An FHA Mortgage: 7 Key Points

    FHA mortgages offer flexibility and low down payments, though they're often pricier than traditional loans backed by private mortgage insurance.
  7. Home & Auto

    How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle of the Great Recession.
  8. FHA loans are often a good alternative for those who have trouble obtaining a conventional mortgage, although you do have to pay an insurance premium.
    Home & Auto

    Mortgage For A Manufactured Home? Try The FHA

    FHA loans are often a good alternative for those who have trouble obtaining a conventional mortgage, although you do have to pay an insurance premium.
  9. Mutual Funds & ETFs

    How do traders use the ABX index?

    Learn about some of the ways traders, banks and even hedge funds have traditionally used the ABX indices to make bets on mortgage-backed securities.
  10. You're probably moving a lot and still paying off your student loans. Is it crazy to get a mortgage in your 20s? Here's how to decide.
    Credit & Loans

    Does A Mortgage Make Sense If You're In Your 20s?

    You're probably moving a lot and still paying off your student loans. Is it crazy to get a mortgage in your 20s? Here's how to decide.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center