NEGATIVE AMORTIZATION Meaning and
Definition
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Negative amortization is a financial term used to describe a situation when the principal balance of a loan increases instead of decreasing over time. In a traditional loan, the borrower makes regular payments that go towards both the interest and the principal balance. However, in cases of negative amortization, the loan payments are not enough to cover the interest charges, resulting in the unpaid interest being added to the principal balance.
This occurs commonly in adjustable-rate mortgages (ARMs) or interest-only loans where the interest rate can fluctuate or where the borrower has the option to make minimum payments. These types of loans typically have a specified period where the borrower pays only the interest, resulting in a smaller payment. However, if the interest rate increases or the borrower only makes minimum payments, the loan balance can grow as the unpaid interest gets added to the principal.
The consequence of negative amortization is that the borrower owes more than the original loan amount and their equity in the asset may diminish or turn negative. It can lead to financial difficulties if the borrower is unable to cover the growing debt. Negative amortization is an important concept for borrowers to understand when considering loan options and calculating the long-term implications of their payments.
Common Misspellings for NEGATIVE AMORTIZATION
- begative amortization
- megative amortization
- jegative amortization
- hegative amortization
- nwgative amortization
- nsgative amortization
- ndgative amortization
- nrgative amortization
- n4gative amortization
- n3gative amortization
- nefative amortization
- nevative amortization
- nebative amortization
- nehative amortization
- neyative amortization
- netative amortization
- negztive amortization
- negstive amortization
- negwtive amortization
- negqtive amortization
Etymology of NEGATIVE AMORTIZATION
The word "negative amortization" is composed of two elements: "negative" and "amortization".
- "Negative" is derived from the Latin word "negativus", which means "denial" or "negation". It is a prefix used to indicate the opposite or absence of something.
- "Amortization" is derived from the Latin word "amortire", which means "to kill" or "to extinguish". In finance, it refers to the process of gradually paying off a debt or loan over a period of time through regular payments, typically including both the principal amount and the interest.
Combining these two elements, "negative amortization" refers to a financial situation where the loan balance increases instead of decreases over time. This can occur when a borrower makes minimum payments on a loan that do not cover the accruing interest.
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