Negative amortization/Deferred interest

When a borrower chooses the minimum payment option on a loan with a payment cap, interest is deferred and added to the balance of the loan

An Adjustable Rate Mortgage (ARM) with a low initial rate and deferred interest option gives you flexible payment options. You can make the minimum monthly payment and defer interest, pay interest only, or pay an amount to amortize the loan over 15 or 30 years.

Although the minimum payment amount changes, typically once every 12 months, interest rate changes may occur each month and are limited only by the lifetime rate cap of the loan. After the initial interest rate expires, interest accrues at the fully indexed rate. Any difference between the actual payment you make and the interest accrued is added to the loan balance. This is known as negative amortization.

This type of loan makes sense for people who want flexibility when it comes to their payments or people with monthly income fluctuations who prefer a minimum payment option each month.

See: Adjustable rate mortgage, Deferred Interest, Payment cap
Compare: Amortization