When monthly mortgage payments are insufficient to cover the interest due, causing the unpaid interest to be added to the loan balance.
Full Definition
Negative amortization occurs when a payment doesn't cover the full interest owed for that period, causing the difference to be added to the loan principal. This means the loan balance grows rather than shrinks — the opposite of normal amortization. This was a feature of some risky mortgage products common before 2008 (Option ARMs, payment-option mortgages). Today, most QM (Qualified Mortgage) loans prohibit negative amortization. It can still occur in some forbearance arrangements or with certain non-QM products. For borrowers, negative amortization is dangerous because it increases the amount owed, reduces equity, and can lead to a situation where the loan balance exceeds the home's value.
Related Terms
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