How Negative Amortization

When the monthly payment is capped so low that it does not cover the full interest charge, the unpaid interest is not forgiven. Instead, the lender adds that unpaid interest to the principal balance. This is called "negative amortization." In this scenario, the borrower makes their payments every month, but their loan balance actually grows larger instead of smaller.Teaser Rates To attract customers, lenders often offer a "teaser rate" for the first year or initial period of the ARM. This is an artificially low interest rate that is usually below the market rate. You should understand that this rate is temporary; once the initial period ends, the rate will adjust up to the fully indexed rate (Index + Margin), likely resulting in a higher payment.