When you get a loan, typically you will make monthly payments to pay off the amount you borrowed. Included in your monthly payments is an amount of money that represents interest. Month by month and year by year, your balance on the loan decreases. However, in some cases, the lender may defer the interest, meaning you make a payment that is less than the total amount due. This results in a lower payment, but at some point in the future, you will still owe the additional interest.
Deferred interest is interest that has accrued but not been paid. Mortgage3 interest is paid in arrears, which means the borrower does not pay it in advance. Mortgage payments cover interest that is already owed to the lender. “Deferred interest” accumulates when a loan payment is not large enough to cover all the interest due.
There are, however, cases in which your outstanding debt does not decrease. One such case is called deferred interest or negative amortization. This can happen if you have a deferred interest mortgage. Or this can occur if you have an adjustable rate mortgage,3 or ARM, and you have a payment cap but your interest rate increases. The difference can be added to your balance, so with deferred interest, instead of lowering the amount you owe on a loan, your debt increases.
This can be a sticky situation, especially if you want to sell your home. Deferred interest can result in being upside-down in your mortgage, which means that you owe more than you can get for the house. On the other hand, a deferred interest mortgage is not always a negative thing. For instance, if you expect to have a substantial salary increase within a few years, deferred interest can work for you. The idea is that once you get your salary increase, you will make enough to cover the higher payments over the life of the loan.
It is essential for you to understand loans and mortgages so that you can know what to expect for your finances after you sign your papers. Be sure to research different kinds of loan and mortgage products so that you can make a financial plan that you can manage. It is also a good idea to keep your eye on interest rates so that if you get an adjustable rate loan, you know whether your interest rates are comparatively high or low.