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What Is A Negative Amortization Loan

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Negative amortization happens when the payments on a loan are smaller than the interest costs. The result is that the loan balance increases because lenders add unpaid interest charges to the original loan balance. Eventually, that process can lead to larger payments at some point in the future.

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What is ‘Negative Amortization’. Negative amortization is an increase in the principal balance of a loan caused by a failure to make payments that cover the interest due. The remaining amount of interest owed is added to the loan’s principal. For example, if the periodic interest payment on a loan is $500 and a $400 payment is allowed.

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In layman’s terms, amortization is simply the process of paying off debt over a period of time. And with most debts, you’ll have to pay your lender back the principal and interest. Your loan principal is the total amount of money that you borrow.

Use this loan balance calculator to track variable and extra payments, and to add on late fees. Optional negative amortization and printable schedule.

Negative amortization also contains a recast period and a recast principal balance cap based on particular state legislation. The recast period tied into negative amortization is typically 60 months or 5 years while the recast principal balance cap is usually up to a 25% increase of the loan balance over the original loan amount.

Barrons Dictionary | Definition for: negative amortization.. The unpaid interest is added to the outstanding loan balance, so the principal increases, rather than.

The remaining $200 will be added to the loan’s principal. As a result of this, the remaining balance increases, and the borrower owes the financial institution more. Amortization refers to the reduction of the loan or mortgage balance over time. In the case of negative amortization, the loan is unamortized.

Negatively Amortizing Loan. By Investopedia Staff. A negatively amortizing loan is a loan with a payment structure that allows for a scheduled payment to be made where the payment made by the borrower is less than the interest charge on the loan. When a payment is made which is less than the interest charge at the time, deferred interest is created.