When the borrower makes loan payments over time, part of each payment goes toward the principal (the amount of money borrowed) and part goes toward interest (the amount paid for the privilege of borrowing). Reducing the principal owed over time is called amortization. If the loan is an ARM, an adjustable rate mortgage, then the borrower may not be required to pay the minimum interest portion of the payment. However, this deferred or unpaid interest gets added to the loan balance, making the balance owed go up (negative amortization) instead of down.
