In some adjustable-rate mortgages, what happens when a borrower makes only the minimum payment?

When a borrower makes only the minimum payment on an adjustable-rate mortgage (ARM), they often end up deferring part of the interest payment. This occurs because the minimum payment is typically lower than the full interest amount due for that period. As a result, rather than paying off the full interest owed, the unpaid portion is added to the principal balance of the loan. This practice can lead to negative amortization, where the loan balance actually increases over time despite regular payments being made.

Understanding this concept is crucial for borrowers, as it highlights the potential risks associated with making only minimum payments on ARMs. It emphasizes the importance of being aware of the payment structure and the long-term implications on the loan balance.