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Negative Amortization
An adjustable-rate mortgage that can have two interest rates: the contract rate or the fully indexed rate.
The contract rate is the minimum agreed-upon rate the consumer may pay; sometimes the contract rate is lower than the fully indexed rate.
The borrower has a choice of which rate to pay, but if the contract rate is lower than the fully indexed rate, that difference is added back to the loan.
If your contract payment is only $500 but the fully indexed payment is $700 and you pay only the contract rate, $200 is added back into your original loan amount.
A neg am mortgage, as it is sometimes called for short, is not for the faint of heart, nor for those with little money down.
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