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Glossary

The Negative amortization

The Negative amortization (also known as NegAm) is a phenomenon that occurs when market interests grow to such a level that the interest share is greater than the amount of the same amortization installment.

In practice, the amortization installments are no longer sufficient to repay the entire principal amount due to the dizzying increase in interest. Paradoxically, in these cases, the principal amount tends to zero and the debt is never extinguished, unless the amortization plan is revised. This phenomenon occurs because borrowers are allowed to make reduced payments for a certain period within the loan term in order to reduce the monthly payments in the early stages and, therefore, the payments received are used to pay the accrued interest on the loan and the unpaid interest cost balance is added to the principal principal payment.

The main risk of negative amortization is that sooner or later the monthly payments will have to increase or the loan will never be repaid. It is a typical situation of real estate loans. People often use negative amortization loans when they think that the value of an asset will increase significantly and that they can therefore potentially refinance the asset at a better interest rate and a higher amount, paying off the original loan and getting a new one. loan with more favorable terms.
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