A Word to the Wise
Amortization
Amortization – from the Latin for “to kill” – is the process of gradually paying off a loan by making planned, incremental payments. With real estate, this is done with a mortgage. As each payment is made, part of it is applied as interest on the loan and the remainder goes toward reducing the principal.
Negative Amortization refers to an increase in the principal balance of a loan caused by a failure to cover the interest due on that loan. For example, if the interest payment on a loan is $500 and the borrower only pays $400, the $100 difference would be added to the loan's principal balance.