Negative Amortization
What Is Negative Amortization?
Negative amortization happens when your loan payment is too small to cover the interest owed — causing your loan balance to increase instead of decrease.
Instead of paying down principal, unpaid interest gets added to your loan.
You end up owing more over time.
How Negative Amortization Happens
It typically occurs with:
- Adjustable-rate mortgages (ARMs) with payment caps
- Certain student loan repayment plans
- Deferred payment programs
If your required payment is lower than the interest accrued, the difference gets added to the principal balance.
Why Negative Amortization Is Risky
Negative amortization can:
- Increase total loan cost
- Extend repayment time
- Create payment shock later
This became widely discussed during the housing crisis involving adjustable mortgage products regulated by agencies like the Federal Housing Administration.
FAQs About Negative Amortization
Is negative amortization common?
Less common today, but still possible in certain loan structures.
Can I stop negative amortization?
Yes, by paying enough to cover all accrued interest.
Does it affect my credit score?
Not directly, but higher balances can increase risk.
Related Terms
