Negative amortization happens when unpaid interest is added to the mortgage balance.
Negative amortization happens when a mortgage payment is not enough to cover the interest due, so unpaid interest is added to the loan balance.
Negative amortization matters because the mortgage balance can grow even while the borrower is making payments. That is the opposite of what most borrowers expect from a standard amortizing mortgage.
It also matters because a low payment can hide risk. If the unpaid interest is added to principal, the borrower may owe more later, face payment shock, or have less equity than expected.
Borrowers may encounter negative-amortization language when reviewing nonstandard loan structures, payment-option features, modification terms, or older loan documents.
The term becomes practical whenever the required payment is lower than the interest accruing on the balance.
| Structure | What happens to principal |
|---|---|
| Fully Amortizing Loan | Scheduled payments are designed to reduce balance to zero by maturity |
| Interest-Only Mortgage | Principal does not fall during the interest-only period, but interest is covered |
| Negative amortization | Balance can increase because unpaid interest is added to principal |
A mortgage has a payment option that lets the borrower pay less than the interest due for a period. The unpaid interest is added to the balance, so the borrower owes more even after making payments.
Negative amortization differs from Amortization because normal amortization reduces the principal balance over time, while negative amortization increases it.
It differs from Interest-Only Mortgage because an interest-only payment covers interest but does not reduce principal. Negative amortization occurs when even the interest due is not fully paid.
It also differs from Balloon Payment. A balloon payment is a large amount due later; negative amortization is the process of the balance growing because unpaid interest is added.