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Negative Amortization

Amortize means to gradually reduce. This is what happens when you make payments toward your mortgage on a monthly basis. The loan balance is reduced, or amortized.

Negative amortization happens when your monthly payment is capped, but your interest rate is not. The fall out too not capping the interest rate is that you may not be paying the full amount of interest due. The interest that goes unpaid for that month is added to your outstanding balance, resulting in negative amortization.

Negative amortization is most common in Adjustable Rate Mortgage (ARM) products. So, in order to avoid negative amortization, be sure to ask your lender if the program you are in will or will not result in negative amortization.

Also, be sure to go over your Truth in Lending disclosure with a fine tooth comb. If you see anything in reference to negative amortization, be sure to call your lender for an explanation.

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