Negative Amortization

Negative Amortization

The increase in the balance of a loan caused by interest payments being larger than the re-payments made on the loan. On adjustable-rate mortgages, if the monthly payments are not enough to cover both the interest and principal payments on the loan, the shortage is added to the principal. This situation occurs when the mortgage payments reach the maximum (as defined by the loan agreement) while the interest rate on the loan is increasing.

Notes:

The good thing about negative amortization is that it allows mortgage payments to stay under a certain level if the interest rate on an adjustable rate mortgage increases. However, the bad thing about negative amortization is that eventually, the mortgage payments may need to increase to allow the larger loan amortize over its remaining life. Thus, the increase in monthly payments can be significant.

See also: Adjustment Frequency, Adjustment Index, Amortization, Adjustable-Rate Mortgage - ARM, Interest, Loan, Margin, Mortgage, Principal

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Negative amortization

A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.