Negative Amortization

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Definition of 'Negative Amortization'

Negative amortization occurs when the monthly payments on a loan are not enough to cover the interest that accrues. This means that the principal balance of the loan actually increases, even though you are making payments.

Negative amortization can occur on any type of loan, but it is most common on adjustable-rate mortgages (ARMs). This is because ARMs have interest rates that can change over time, and if the interest rate increases, the monthly payments will also increase. If the monthly payments don't increase enough to cover the interest that accrues, the principal balance will increase.

Negative amortization can be a problem because it can lead to a higher loan balance and higher interest costs. In some cases, it can even lead to foreclosure.

There are a few things you can do to avoid negative amortization. First, make sure that you are aware of the terms of your loan. Second, make sure that your monthly payments are high enough to cover the interest that accrues. Third, if you are considering an ARM, make sure that you understand the risks involved.

If you are already experiencing negative amortization, there are a few things you can do to try to stop it. First, you can try to make extra payments on your loan. This will help to reduce the principal balance and bring your loan back into positive amortization. Second, you can try to refinance your loan into a fixed-rate mortgage. This will lock in your interest rate and prevent it from increasing.

Negative amortization can be a serious problem, but it can be avoided if you are aware of the risks and take steps to protect yourself.

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