What is the term for the shortfall added back into the principal when a loan payment does not cover the interest?

The correct term for the shortfall that is added back into the principal when a loan payment does not cover the interest is negative amortization. Negative amortization occurs when the payments made towards a loan are insufficient to cover the interest charged, leading to an increase in the outstanding loan balance. This can happen in certain loan agreements, such as adjustable-rate mortgages or other specialized loan products, where the borrower may have a lower initial payment that does not satisfy the interest cost.

In this scenario, the unpaid interest accumulates and is added to the principal, resulting in a larger total amount owed over time. Borrowers might find themselves in a position where their debt grows rather than decreases, highlighting the importance of understanding loan terms before entering into an agreement.

The other terms, while relevant in the context of mortgages and real estate, do not accurately describe this specific financial situation. For instance, current amortization refers to the process of reducing the principal balance of a loan through scheduled payments, and a prepayment penalty refers to fees incurred when paying off a loan early. Delinquent payments relate to missing or late payments but do not specifically address the issue of unaddressed interest being added to the principal.