Final answer:
It is true that with a negative amortization mortgage, borrowers can experience an increase in their total mortgage balance over the initial years due to unpaid interest being added to the loan balance, a situation that might arise with certain adjustable-rate mortgages.
Step-by-step explanation:
True, with a negative amortization home mortgage, the borrower can indeed see an increase in the total mortgage balance over the first several years of the loan. Negative amortization occurs when the monthly payments made by the borrower are less than the interest that is due, causing the unpaid interest to be added to the outstanding loan balance. This type of loan structure may be used in certain adjustable-rate mortgages (ARMs) and often leads to a situation where the borrower owes more on the mortgage than the original loan amount.
Different factors such as fluctuating interest rates, introductory rates, and the financial stability of the borrower can lead to variations in how a mortgage is serviced and handled. For example, if the interest alone on a monthly mortgage payment for a $250,000 home jumps from $833 at 4 percent to $1,458 at 7 percent, and the borrower's payments do not cover this amount, the unpaid interest will be added to the loan balance. This is specifically relevant to the ARMs' structure during the housing crisis when homeowners were not able to maintain the surged payments after introductory rates, resulting in significant increases in their loan balances or even forcing them into default.