| the increase of the principal of a loan by the amount by which periodic loan payments fall short of the interest due, usually as a result of an increase in the interest rate after the loan has begun. |
Negative Amortization
The increase in the balance of a loan caused by interest payments being larger than the re-payments made on the loan. On adjustable-rate mortgages, if the monthly payments are not enough to cover both the interest and principal payments on the loan, the shortage is added to the principal. This situation occurs when the mortgage payments reach the maximum (as defined by the loan agreement) while the interest rate on the loan is increasing.
Investopedia Commentary
The good thing about negative amortization is that it allows mortgage payments to stay under a certain level if the interest rate on an adjustable rate mortgage increases. However, the bad thing about negative amortization is that eventually, the mortgage payments may need to increase to allow the larger loan amortize over its remaining life. Thus, the increase in monthly payments can be significant.
Related Links
Understanding Your Mortgage
Understanding the Mortgage Payment Structure
Mortgages: Fixed-Rate Versus Adjustable-Rate
See also: Adjustable-Rate Mortgage - ARM, Adjustment Frequency, Adjustment Index, Amortization, Interest, Loan, Margin, Mortgage, Principal