# What is negative amortization?

Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due. When home prices are appreciating rapidly, negative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home. Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount.

Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due. When home prices are appreciating rapidly, egative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home. Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount.

Negative amortization is the process by which the balance on your loan actually increases. This typically only occurs with an Option ARM mortgage. In the Option ARM payment structure, Negative Amortization occurs when you only make the required minimum monthly payment, but the payment is not enough to cover the fully indexed rate, causing the difference to be added to the principal.

Negative amortization occurs when interest rates change more frequently than payments or where payment changes are capped. Your payment may not be sufficient to cover the interest accruing on your loan. If this happens, the principal balance will grow by the amount of unpaid interest because you are borrowing from the equity in your home to pay this interest.