What is deferred interest, or negative amortization?
A. Deferred interest is the shortfall, if any, between the amount of interest due on a loan and the amount of interest paid. Interest defers whenever the Minimum Payment is not large enough to pay all of the interest due on the loan. Because payment change caps limit only the amount of the payment increase and not the interest rate increase, the Minimum Payment may not cover all of the interest due on the loan. If the Minimum Payment does not cover all current monthly interest due, the unpaid interest for the month is added to the loan balance (the amount added is called “negative amortization”) and future interest is charged on that amount. Deferred interest will increase the amount a borrower owes and will reduce the equity in the property securing the loan. (NOTE: Payment Option ARMs include a cap on how high the principal balance can increase. This cap, typically ranging from 110% to 125% of the original loan amount, is defined in the loan documents.) Q. How is my monthly interest
