Also found in: Wikipedia.
When your loan principal increases rather than decreases because your monthly payment isn't enough to cover the loan interest, that's called negative amortization.
This can happen if you have an adjustable-rate mortgage (ARM) that specifies a payment cap, or maximum rate increase, and the interest rate rises above the cap.
Negative amortization can also occur with mortgages that have no rate adjustment caps, or those that let you make very low initial payments that don't cover the loan interest.
The promise of low initial payments may make loans that could result in negative amortization attractive, but there are substantial risks. Eventually, your monthly payment will have to increase, sometimes sharply, to pay off the larger loan.
If interest rates have risen, you may not be able to refinance at a favorable rate. And if real estate prices fall, you could find yourself with a mortgage loan that is larger than the value of your home.
The situation that exists when one's monthly loan payments are insufficient to completely pay currently accrued interest.The unpaid interest is added to the principal balance. Rather than the normal situation of a principal balance becoming smaller with a fully amortizing loan, this situation results in a larger balance, hence the name negative amortization. It occurs most often when a borrower has a variable-rate loan but with fixed monthly payments for a short period of time.
A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called “deferred interest.”
See Adjustable Rate Mortgage/How the Monthly Payment on an ARM Is Determined/Negative Amortization ARMs.