ABA Family Legal Guide

Buying and Selling a Home

Financing a Home Purchase

Different Types of Loans

What is negative amortization?

In a typical home loan, the borrower pays off the interest and principal in installments. This reduction of the principal is known as amortization. In a negatively amortized loan, the installment payments do not cover all the interest due each month. This unpaid interest is added to the principal that is owed, resulting in a debt that increases, rather than decreases.

The worst problem with negative amortization occurs in a market in which home values decrease. In such an environment, the size of the debt could increase to the point where it would exceed the equity in the home. Sadly, upon the sale of the home, the owner may not be able to repay what is owed. Of course, in a down market, this could also happen with a conventional mortgage.

Most professionals advise buyers to avoid a negatively amortized loan. The risks outweigh the benefits of the lower payments. It may be better to postpone buying a home until you can make higher payments or investigate a lower-cost loan from the FHA or VA.