What is Negative Amortization?

Negative amortization, also known as Neg Am, occurs when the loan payment you make for any period is not enough to cover the interest charged over that period and as a result your outstanding loan balance increases.

What Is a Negative Amortization Loan?

Negative amortization loans (or Neg Am loans) are types of loans that do not reduce your loan balance. The initial payments of such loans are not enough to cover the full interest and the remaining unpaid interest is added to the balance as a result of which your loan amount increases.

Of course, negative amortization loans allow payments that are less than the interest due only for a certain period of time. After that period is over you will have to increase your payments so that they cover the full cost of the new interest, which is now higher.

Usually Neg Am loans are used to finance the purchase of a property by people (often first time home buyers) who cannot afford the huge monthly mortgage payments. They choose this type of loan hoping or expecting that their income will increase in future and they will be able to cover the payments. However, often such people fail to realize that later on the cost of the loan is significantly increased.

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