Negative Amortization occurs when your monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to your principal loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest due or when the minimum payments are set at an amount lower than the amount you owe in interest.
Adjustable Rate Mortgage
An interest rate cap limits the amount your interest rate can change at each adjustment. There can be two types of caps: Periodic Change caps, which limit the amount the rate may increase or decrease at each change; or Life of Loan caps, which specify the highest or lowest that your interest rate can be over the life of the loan.
With most ARMs, there is an initial period when your interest rate is fixed, after which the loan interest will begin to adjust periodically. Your interest rate will be recalculated at designated “Change Dates”, which may be monthly, quarterly, yearly, or multi-year periods. The period between each rate change is called the adjustment period. If the interest rate changes, your total monthly payment generally will also change.