Negative amortization

Occurs when the monthly payments in an adjustable-rate mortgage loan do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest due or when the minimum payments are set at an amount lower than the amount you owe in interest.

An increase in the balance of a loan caused by adding unpaid interest to the loan balance; this occurs when the payment does not cover the interest due.

A situation in which a borrower is paying less interest than what is actually being charged for a mortgage loan. The unpaid interest is added to the loan's principal. The borrower may end up owing more than the original amount of the mortgage.

Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn't covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

An increase in the outstanding balance of a loan resulting from the failure of periodic payments to cover required interest charged on the loan. Generally occurs during the first 5 to 10 years of the life of a graduated payment mortgage (GPM) and under indexed loans for which the applicable interest rate may be changed without affecting the monthly payments.

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.

Occurs when the monthly payments in an adjustable-rate mortgage loan do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest due or when the minimum payments are set at an amount lower than the amount you owe in interest.