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Negative Amortization

1. A loan in which the outstanding principal balance goes up instead of down because the monthly payments are not large enough to cover the full amount of interest due and being insufficient the unpaid interest needs to be added to the principal amount.2. Occurs when interest accrued during a payment period is greater than the scheduled payment and the excess amount is added to the outstanding loan balance. For example if the interest rate on an ARM exceeds the interest rate cap then the borrower’s payment will not be sufficient to cover the interest accrued during the billing period. Theunpaid interest is added to the outstanding loan balance.