Negative amortization.
In plain English
Negative amortization happens when a payment is smaller than the interest charged that period, so the unpaid interest is added to the balance and the loan grows rather than shrinks. It can occur on some adjustable-rate and payment-option mortgages that let you pay less than the full interest, and on certain student loans in deferment. The borrower feels relief from a low payment while quietly owing more each month. Left unchecked, the balance can climb above the home's value, and payments later jump sharply to catch up.
01Why it matters
A payment that does not cover interest feels affordable while it quietly increases your debt, so spotting negative amortization prevents a balance that grows out from under you.
02The math, step by step
On a 250,000 dollar loan, the interest for a month is 1,300 dollars but the option payment is only 1,000 dollars. The unpaid 300 dollars is added to the balance, so next month you owe 250,300 dollars.
03What this is NOT
Negative amortization is NOT just a small payment. The payment fails to cover the interest, so the shortfall is added to the balance and your debt grows each month.
04Receipts
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