Negative Amortization

Negative amortization is a financial term used to describe a situation in which the outstanding principal balance of a loan or mortgage increases over time, rather than decreasing. This occurs when the payments made by the borrower are not large enough to cover the interest due on the loan. The unpaid interest is added to the principal balance, resulting in a higher balance than the original loan amount.

History of Negative Amortization

The concept of negative amortization has been around for centuries, but it has become more popular in recent years due to the availability of adjustable-rate mortgages (ARMs). ARMs are loans with interest rates that can change over time, and they often have a period of low initial payments. This can lead to negative amortization if the payments are not large enough to cover the interest due.

Negative amortization can also occur with other types of loans, such as student loans, car loans, and personal loans. In these cases, the borrower may choose to make smaller payments than the amount due, resulting in the loan balance increasing over time.

Table of Comparisons

Summary

Negative amortization is a financial term used to describe a situation in which the outstanding principal balance of a loan or mortgage increases over time, rather than decreasing. This occurs when the payments made by the borrower are not large enough to cover the interest due on the loan. Negative amortization can occur with adjustable-rate mortgages, student loans, car loans, and personal loans. For more information about negative amortization, you can visit websites such as Investopedia, Bankrate, and The Balance.

See Also

• Amortization
• Adjustable-Rate Mortgage (ARM)
• Interest Rate
• Principal Balance
• Student Loan
• Car Loan
• Personal Loan
• Loan Payment
• Interest-Only Loan
• Deferred Interest

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