Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid principal balance of the loan. Also called negative amortization. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.
When the monthly payments do not cover all of the interest cost, the unpaid interest is deferred by adding it to the loan balance.
MP] Same as Negative Amortization.