What is negative amortization?

Negative amortization occurs when a borrower's monthly loan payment is not large enough to cover the full interest due, causing the unpaid interest to be added to the principal balance. Instead of the loan balance shrinking over time as it normally would, it actually grows. This can happen with certain types of adjustable-rate or minimum-payment loan products where payment caps prevent the payment from rising even when interest costs do.

Negative amortization is a red flag that borrowers should take care to avoid. Loan products that allow it are far less common than they were prior to the 2008 financial crisis, as federal regulations now require lenders to more carefully assess a borrower's ability to repay. Buyers in the Western Catskills should ensure they fully understand the payment structure of any mortgage they are considering and ask their lender directly whether any version of deferred interest or negative amortization is possible under the loan's terms. A straightforward fixed or fully amortizing adjustable-rate mortgage will not have this issue.