Which mortgage loan type is designed to experience negative amortization in the early years?

The mortgage loan type that is specifically designed to experience negative amortization in the early years is the graduated payment mortgage. This type of loan allows the borrower to start with lower initial payments that gradually increase over time. Since the payment increases are structured to be lower than the interest accrued in the early years, this results in negative amortization, where the loan balance grows instead of decreases.

In the graduated payment mortgage, the initial payments may not cover the full interest, which can lead to an increase in the principal amount owed, thereby providing borrowers with lower payments initially, which may be attractive for borrowers who expect an increase in income over time. This structure is particularly suitable for those who may be starting out in their careers or have limited cash flow in the short term.

Other loan types do not specifically incorporate a design for negative amortization in this way. Interest-only ARMs allow borrowers to pay only interest for a set period, but this does not inherently cause negative amortization unless the payment structure changes unfavorably later. Growth equity and shared appreciation mortgages have different frameworks focused on equity sharing or appreciation, rather than on structuring payments to intentionally create negative amortization.