Negative amortization is a phenomenon in which the principal balance on a loan increases every month, rather than decreasing with each payment. because the payment fails to cover the payable principle and interest . For Instant, when someone makes a loan payment, that payment is used to pay off the interest which has accrued, and the remainder of the payment is applied to the principal. In the early stages of the loan, the payments often go almost entirely to interest, with a small fraction going to the principal.
As a result, at the end of each month, the unpaid amount is added to the balance of the loan, causing it to increase. when a lender would consider providing a loan with negative amortization is when the assets securing the facility are determined to have significant equity value.
These loans have many names: Negative Amortizing Loan, Neg Am or NegAm, Deferred Interest Option Loan and Pay Option Arm.
Characteristics of Negative Amortization
Amortization means to reduce something over time. A negative amortization loan actually increases your loan over time. In the negative amortization loan system, the periodic payment doesn’t include the interest amount due for that period of loan. The result of this type of loan is that the principal or loan balance gets higher by the unpaid interest amount. Negative amortization loans can involve high risks for the investors. Negative amortization is also a term used for Graduated Payment Mortgage (GPM).