Deferred mortgage interest

Deferred mortgage interest occurs in a loan that allows for minimum borrower payments that are less than the interest expense on the loan. If a borrower elects to make minimum payments under this arrangement, the total balance of the mortgage will increase over time, which constitutes negative amortization. This feature is sometimes found in an adjustable rate mortgage, where there can be deferred mortgage interest at the beginning of the loan, which is eliminated later when payments are scheduled to increase. This arrangement can be useful when a borrower currently has low cash flows, but expects to have higher cash flows in the future that can pay for the increased amount of the loan. However, it also means that a borrower can soon owe an excessive amount, and so has a higher risk of default.