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. Amortization Schedule

    A complete schedule of periodic blended loan payments, showing ...
  2. Negatively Amortizing Loan

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

    The amount of interest that is added to the principal balance ...
  4. Deferred Interest Mortgage

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

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

    The period of time on a graduated payment mortgage during which ...
Related Articles
  1. Personal Finance

    Mortgage Basics: The Amortization Schedule

    By Lisa SmithThe amortization schedule for a residential mortgage is a table that provides a breakdown of the schedule of payments from the loan's first required payment to the loan's final payment. ...
  2. Investing

    Understanding the Mortgage Payment Structure

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

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  4. Personal Finance

    Choose Your Monthly Mortgage Payments

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

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  6. 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.
  7. Investing

    This ARM Has Teeth

    Find out how to avoid getting bitten when your mortgage rate resets.
  8. Personal Finance

    What is an Amortization Schedule?

    An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment.
  9. 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.
  10. Investing

    Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
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. Is there any limit on how much I can pay toward my mortgage principal every month?

    I understand that I'll be paying more interest and less principal for almost the first half of my mortgage term. I'm planning ... Read Answer >>
  3. Why is more interest paid over the life of a loan when it is capitalized?

    Learn what it means to capitalize interest on a loan. Understand why more interest is paid over the life of a loan when it ... Read Answer >>
  4. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  5. What are the best ways to pay off my mortgage quickly?

    Learn how mortgage payments may be reduced and how to save thousands on mortgage loans by lowering the interest and principle ... Read Answer >>
  6. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
Hot Definitions
  1. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  2. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  3. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  5. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  6. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
Trading Center