Negative Amortization

What is 'Negative Amortization'

Negative amortization is an increase in the principal balance of a loan caused by making payments that fail to cover the interest due. The remaining amount of interest owed is added to the loan's principal, which ultimately causes the borrower to owe more money.

BREAKING DOWN 'Negative Amortization'

For example, if the periodic interest payment on a loan is $500 and a $400 payment may contractually be made, $100 is added to the principal balance of the loan.

Adjustable-rate mortgages with a negative amortization feature are typically known as payment option ARMs. Fixed-rate mortgages with this feature are known as graduated payment mortgages.

While these mortgages can provide borrowers with the ability to make low monthly payments for a short time, the monthly payments must increase substantially at some point over the term of the mortgage. The date or dates when payments increase on a fixed-rate graduated-payment mortgage are known with certainty. Payment option ARMs also have scheduled payment increases, but they carry triggers that can cause the mortgage to recast before a scheduled payment increase. As a result, payment option ARMs carry a great deal of payment shock risk.

RELATED TERMS
  1. Deferred Interest

    The amount of interest that is added to the principal balance ...
  2. Negatively Amortizing Loan

    A loan with a payment structure that allows for a scheduled payment ...
  3. Deferred Interest Mortgage

    A mortgage loan that allows the borrower to make minimum payments ...
  4. Accelerated Amortization

    Extra payments made towards paying down a mortgage principal. ...
  5. Graduation Period

    The period of time on a graduated payment mortgage during which ...
  6. Interest Due

    The portion of a current mortgage payment that is comprised of ...
Related Articles
  1. Investing

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  2. Personal Finance

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
  3. Personal Finance

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  4. Personal Finance

    Mortgage Amortization Strategies

    Should you get a 30-year mortgage? A 15-year one? Ways to decide which mortgage is the best fit.
  5. Markets

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  6. Personal Finance

    Mortgage Basics: Costs

    By Lisa SmithPeople generally think about a mortgage in terms of the monthly payment. While that payment represents the amount of money needed each month to cover the debt on the property, the ...
  7. Personal Finance

    Mortgage Basics: Fixed-Rate Mortgages

    By Lisa SmithA fixed-rate mortgage is a loan that charges a set rate of interest that does not change throughout the life of the loan. It is the traditional loan used to finance the purchase ...
  8. Personal Finance

    Understanding The Mortgage Payment Structure

    While a mortgage’s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
  9. Investing

    Payment Option ARMs: A Ticking Time Bomb?

    With these mortgages the loan's principal can continue to increase - even as payments are made.
  10. Markets

    Best 3 Mortgage Calculator Websites for Canadian Residents

    Understand the key features of Canadian mortgages, and discover a few of the best online mortgage calculators for Canadian home loans.
RELATED FAQS
  1. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  2. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
  3. I've come into a large amount of money. Should I invest it or pay off my mortgage?

    There is no simple answer to this question as it depends on a number of key factors, namely the aspects or criteria of your ... Read Answer >>
  4. What is the difference between a PMI (primary mortgage insurance) loan and a Federal ...

    Understand the difference between a conventional mortgage that requires primary mortgage insurance and a Federal Housing ... Read Answer >>
  5. Is an adjustable rate mortgage (ARM) safe?

    Learn why an adjustable rate mortgage (ARM) can be a safe option as long as the borrower is familiar with the underlying ... Read Answer >>
  6. Is there any time I would want to have a zero-principal mortgage?

    As a general rule, entering a zero principal mortgage, or what is commonly referred to as an "interest-only mortgage", is ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center