negative amortization

Anomalous situation in which the principal amount increases with the payment of monthly installments. It occurs typically in graduated payment mortgages (GPM) designed to accommodate young executives or professionals (who have low starting income but high potential for rapid growth). In a GPM, the installment amount in the initial months is insufficient to cover the interest, therefore the unpaid interest is added to the principal balance every month. Also called partially amortizing loan.