What Is Negative Amortization?

What Is Negative Amortization?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Negative amortization happens when the payments on a loan don’t cover the interest costs. The interest then accumulates and is added to your loan balance. So rather than your loan balance reducing each time you make a payment, it could grow because the unpaid interest is added back to your loan. In other words, you’re increasing your debt. This usually happens when you have an adjustable-rate mortgage or other types of flexible payment home loans.

Related Questions

1. Is Negative Amortization common?

No, negative amortization is not common. It often occurs with certain types of loans, such as payment-option adjustable-rate mortgages. These loans allow the borrower to decide how much to pay each month, sometimes even less than the interest alone.

2. Can Negative Amortization be avoided?

Want More Financial Tips?

Get Our Best Stuff First (for FREE)
We respect your privacy and you can unsubscribe anytime.

Yes, negative amortization can be avoided by making sure your monthly payments cover at least the interest on the loan. If your loan terms allow for varied payments, always opt to pay more than the interest.

3. Is Negative Amortization a good or a bad thing?

Negative amortization generally is considered a bad thing because instead of reducing your debt, it increases it. This might lead to a situation where you owe more than your property or asset is actually worth.

4. Does Negative Amortization affects my credit score?

While negative amortization in itself doesn’t directly affect your credit score, it could indirectly affect it. If the loan balance increases too much, it could lead to your owing more than your property is worth, putting you at risk of default – which does impact your credit score.

5. What should you do if you’re in a Negative Amortization situation?

If you find yourself in a negative amortization situation, it’s recommended you try to refinance your loan or start making higher payments. It will help decrease your loan balance instead of it growing. Always consult with a trusted financial advisor for personalized advice.