I just learned about something really devious called a negative amortization mortgage (or any other type of loan). As Dr. Don explains:
Negative amortization means that your loan balance is increasing instead of decreasing. With a negative amortization loan, when your monthly payment on an ARM (adjustable-rate mortgage) isn't enough to cover the interest expense and principal payment, the shortage is added to your loan balance.Say, for example, than in a normal mortgage your monthly payment is $2000. Of that, $400 may go towards paying off the principal and $1600 may go towards paying interest on the loan. With a negative amortization mortgage your monthly payment on the same size loan could be $1200 instead of $2000, but each month the entire $1200 would go towards paying interest -- and an additional $800 could be added to your principal. Thus, at the end of each month you owe more on your house than you did at the beginning of the month.
