Negative Amortization – Some adjustable loans only require a borrower to pay a monthly minimum payment, even if the interest rate rises. If the rate rates and the borrower pays only the minimum payment, they did not pay the full interest amount owed to the lender. The difference is added to the balance of the loan, causing the loan balance to increase, rather than decrease.
- Example: If a borrower fails to pay the full interest amount and principal amount in a monthly payment, the difference is added back onto the balance of the loan. The result is a higher balance and shows how negative amortization has an adverse affect on a borrower.
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