Negative Amortization
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes only the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called "deferred interest." The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.

Negative Amortization Loan
An adjustable rate mortgage loan, usually based on the 11th District Cost of Funds Index (COFI) plus a margin. This type of loan allows a mortgagor more payment flexibility than a standard ARM by paying simple interest, full interest or interest and principal in any given month. The loan adjusts monthly and has a life cap. Provided a mortgagor has the discipline to make more "full" payments than interest-only (thereby paying down the principal balance), this can be an excellent loan for first-time home buyers, self-employed persons and owners of rental properties whose incomes are inconsistent.

Non-Conforming Loan
Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, loan characteristics or underwriting guidelines.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Notice of Default (NOD)
A formal written notice to a borrower that a default has occurred and that legal action may be taken.