Negative Amortization Definition


Negative amortization occurs mostly with an adjustable rate mortgage (ARM). Negative amortization occurs when the monthly payment doesn't cover the accrued monthly interest. The difference between the minimum payment and the accrued interest is added to the principal and the borrower will have to pay back more than they borrowed. This is called negative amortization.

Negative amortization is also called deferred interest or accrued interest. With a Neg Am loan low or moderate income borrowers can afford to become homeowners. However, at the time of closing lenders are required by the federal law to make sure borrowers are well aware of any possible complications to arise from negative amortization and will demand additional disclosure documents.

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