Final answer:
Negative amortization is a situation in which the balance of a mortgage loan increases while payments are being made. This can occur with adjustable-rate mortgages or interest-only mortgages when the monthly payments are insufficient to cover the accruing interest. It is important to be aware of the potential long-term financial consequences of negative amortization.
Step-by-step explanation:
A situation where the balance of the mortgage loan actually increases while payments are being made is called negative amortization.
This can occur with certain types of loans, such as adjustable-rate mortgages or interest-only mortgages. In these cases, the monthly payments may be insufficient to cover the interest that accrues on the loan, leading to the balance increasing over time.
For example, if a borrower has an interest-only mortgage and only pays the interest portion of the loan each month, the principal balance will not decrease and may even increase.
It's important to note that negative amortization can have long-term financial consequences for borrowers, as it can lead to higher overall interest costs and the potential for owing more on the loan than the original amount borrowed.