Deferred Interest

What is a 'Deferred Interest'

A deferred interest is 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.

RELATED TERMS
  1. Negatively Amortizing Loan

    A loan with a payment structure that allows for a scheduled payment ...
  2. Negative Amortization

    An increase in the principal balance of a loan caused by making ...
  3. Amortization Schedule

    A complete schedule of periodic blended loan payments, showing ...
  4. Non-Amortizing Loan

    A type of loan in which payments on the principal are not made, ...
  5. Negative Amortization Limit

    A provision in certain loan contracts that limits the amount ...
  6. Deferred Interest Mortgage

    A mortgage loan that allows the borrower to make minimum payments ...
Related Articles
  1. Professionals

    Amortization

    Amortization describes the paying off of debt in regular installments over a period of time.
  2. Credit & Loans

    Mortgage Basics: The Amortization Schedule

    By Lisa SmithThe amortization schedule for a residential mortgage is a table that provides a breakdown of the schedule of payments from the loan's first required payment to the loan's final payment. ...
  3. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  4. Credit & Loans

    What is an Amortization Schedule?

    An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment.
  5. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  6. Personal Finance

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
  7. Credit & Loans

    Mortgage Basics: Fixed-Rate Mortgages

    By Lisa SmithA fixed-rate mortgage is a loan that charges a set rate of interest that does not change throughout the life of the loan. It is the traditional loan used to finance the purchase ...
  8. Credit & Loans

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  9. Home & Auto

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
  10. Credit & Loans

    Mortgage Amortization Strategies

    Should you get a 30-year mortgage? A 15-year one? Ways to decide which mortgage is the best fit.
RELATED FAQS
  1. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  2. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  3. Why is more interest paid over the life of a loan when it is capitalized?

    Learn what it means to capitalize interest on a loan. Understand why more interest is paid over the life of a loan when it ... Read Answer >>
  4. When capitalizing interest, will interest accrue while you are in a deferment?

    Learn what capitalized interest is. Understand why interest accrues while a person is in a deferment, based on capitalized ... Read Answer >>
  5. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  6. What's the difference between a grace period and a deferment?

    Learn the difference between grace periods and deferments and when each type of delayed-payment period applies to various ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center