What Is Negative Amortization?
Negative amortization happens when a loan's monthly payment is too small to cover the interest that is accruing, so the unpaid interest is added to the principal and the balance grows instead of shrinking. The borrower can make every payment on time yet owe more than they originally borrowed. It is the opposite of normal amortization, where each payment reduces the balance.
How It Happens
- A loan allows payments that are less than the interest due (for example, an optional minimum payment)
- The shortfall in interest is added to the principal
- The balance increases over time, and equity can erode
Why It Matters and How It Is Regulated
Negative-amortization features contributed to the 2008 housing crisis, and federal rules now sharply restrict them. Loans with negative amortization generally cannot be "qualified mortgages" under the Dodd-Frank ability-to-repay standards, and the feature must be clearly disclosed. Florida buyers occasionally encounter it in certain adjustable-rate or specialty loans, so it is important to read the note carefully and understand whether minimum payments will cause the balance to rise.
Related Terms
- Mortgage — The loan where the feature can appear
- Prepaid Interest — A related interest concept at closing
- Refinance — A common response to a growing balance
Barnes Walker Real Estate
Barnes Walker's attorneys review loan terms and disclosures for Florida borrowers. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC