ABSTRACT
Negative amortization is a financing structure whereby the monthly payments on a loan are less than the amount required to amortize the loan. In this situation, the amount owed on a loan becomes larger each month due to unpaid interest until at some future date the payment is increased or the loan is paid off. The advantage of this type of loan is the lower initial payment, and some buyers may even gamble that the property will appreciate in value at a faster rate than the increasing amount owed. An index-adjusted loan may incidentally create a negative amortization situation if the interest rate it is tied to rises enough to create more interest due than a fixed monthly payment. However, many index-adjusted loans use variable payment amounts to prevent such a situation.
