Negative Amortization is defined as the interest due on the loan is more than the monthly payments. The balance unpaid interest is added to the balance of the loan. In negative amortization, the loan of the borrower increases and thus he ends up owing more than the original loan.
Negative Amortization Explained
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.
