Negative Amortization

What is Negative Amortization?

Negative amortization occurs when a borrower's scheduled or minimum loan payment is less than the interest that accrues during the payment period, causing the unpaid interest to be added to the outstanding principal balance. Instead of shrinking over time as with standard amortization, the loan balance grows. Negative amortization can occur in adjustable-rate mortgages with payment caps, interest-only loans after the initial period ends, or certain graduated payment mortgages. Some loans specifically allow negative amortization—called negatively amortizing loans or option ARMs—by giving borrowers a minimum payment option that covers only part of the interest due. Regulators have restricted the use of negatively amortizing mortgages for most consumers under the Dodd-Frank Act's Ability-to-Repay (ATR) rules, citing the risk of borrowers owing more than the property is worth.