What type of loan continues to grow in balance even while monthly payments are being made?

A negative amortization loan is characterized by a scenario where the monthly payments are not sufficient to cover the interest accruing on the loan. As a result, the unpaid interest gets added to the principal balance of the loan. This means that even while the borrower is making monthly payments, the total balance of the loan continues to increase rather than decrease. This type of loan can lead to significantly higher outstanding balances over time, which can create challenges for borrowers when the loan eventually becomes due or when they attempt to refinance.

In contrast, an interest-only mortgage typically allows borrowers to pay only the interest for a specified period, but this does not inherently lead to a growing balance unless the terms of the loan dictate otherwise, such as when the loan shifts to a repayment phase. Conventional mortgages and fixed-rate mortgages consistently reduce the principal balance with each payment, as they are structured to cover both interest and principal, leading to gradual equity accumulation in the property.