Deferred Interest

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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.

BREAKING DOWN '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.

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