Which type of mortgage loan is most likely to result in negative amortization?

A graduated payment loan is designed to start with lower payments that gradually increase over time. In the early years of this loan type, the monthly payments may not cover the full amount of interest due, leading to negative amortization. This means that instead of reducing the principal balance of the loan, it actually increases because the unpaid interest gets added to the outstanding balance. This feature is characteristic of graduated payment loans, making them particularly susceptible to negative amortization.

In contrast, fixed-rate mortgages typically have consistent monthly payments that cover both principal and interest throughout the life of the loan, eliminating the possibility of negative amortization. Interest-only loans allow the borrower to pay only the interest for a specific period, which could lead to principal not being reduced, but often do not result in negative amortization if the borrower eventually pays down the principal. Conventional mortgages are standard loans that usually require regular payments that address both principal and interest, ensuring the loan balance decreases over time.