A graduated payment mortgage is a loan where the payment increases each year for a predetermined amount
of time (such as 5 or 10 years), then becomes fixed for the remaining duration of the loan.
When interest rates are high, borrowers can use a graduated payment mortgage to increase their chances
of qualifying for the loan because the initial payment is less. The downside of opting for an smaller
initial payment is that the interest owed increases and the payment shortfall from the initial years of
the loan is then added on to the loan, potentially leading to a situation called "negative
amortization." Negative amortization occurs when the loan payment for any period is less than the
interest charged over that period, resulting in an increase in the outstanding balance of the loan.
