Adjustable-rate mortgages with interest rate caps can lead to negative amortization.

Question

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Interest rate caps on adjustable-rate mortgages restrict how much the interest rate can increase, but if the cap is too high or if the interest rate increases beyond the cap, the monthly mortgage payment may not cover the interest owed. This results in negative amortization, where the unpaid interest is added to the principal balance and makes it grow over time.

Adjustable-Rate Mortgages with Interest Rate Caps Can Lead to Negative