Definition
Negative amortization occurs when your payment is less than accruing interest—the unpaid interest gets added to your balance, which grows despite payments. You owe more than you originally borrowed. Modern qualified mortgages typically prohibit this dangerous practice.
Not sure where this fits?
Answer a few questions and we’ll open the path that fits, at the right step.
Find my pathAbout this term
Negative amortization occurs when a borrower's payment is less than the monthly interest charge. The unpaid interest is added to the loan balance, which grows despite regular payments. This can occur with option ARMs (adjustable-rate mortgages allowing payment options) where borrowers choose minimum payments below accruing interest. While negative amortization increases principal owed, modern qualified mortgages typically prohibit it. Negative amortization is dangerous because borrowers can end up owing more than they borrowed, facing significant risk if property values decline.
Pro Tip
Avoid loans allowing negative amortization; they increase risk and are generally prohibited in qualified mortgages.
Example
A loan accrues $2,000 monthly interest, but the borrower pays $1,500; the $500 unpaid interest is added to the $300,000 balance, which grows to $300,500 despite payments.