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Investopedia explains 'Negative Amortization'
For example, if the periodic interest payment on a loan is $500 and a $400 payment may contractually be made, $100 is added to the principal balance of the loan.
Adjustable-rate mortgages with a negative amortization feature are typically known as payment option ARMs. Fixed-rate mortgages with this feature are known as graduated payment mortgages.
While these mortgages can provide borrowers with the ability to make low monthly payments for a short time, the monthly payments must increase substantially at some point over the term of the mortgage. The date or dates when payments increase on a fixed-rate graduated-payment mortgage are known with certainty. Payment option ARMs also have scheduled payment increases, but they carry triggers that can cause the mortgage to recast before a scheduled payment increase. As a result, payment option ARMs carry a great deal of payment shock risk.
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