What is Negative Amoritization?

Negative amortization is a confusing term for many people. When we go to purchase a home we are faced with many terms and concepts and most people don’t have the extensive financial backgrounds to understand them all.

What It Is

A loan amortization schedule is when your payments reduce your overall loan balance. The payments you make to the mortgage company are split in to two parts. The first part is the amount that pays the interest on the loan, and the second part applies to the principal balance. When the monthly payments on your mortgage are less than the amount to cover interest, negative amortization occurs.

Does This Have Any Advantages?
In short, yes and no. Negative amortization allows you to lower the payments on your mortgage. Most companies who do these types of loans will only offer the lower payments for a certain amount of time, in general five years, which means that your payment does eventually go up. The advantage is that you were able to ease into higher payments and avoided payment shock.

The disadvantage of negative amortization is that your payment will increase and your balance may be higher than the amount you borrowed.  The negative amount is added to the loan balance, making you fall into deeper debt.

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