What is "negative amortization" in a mortgage?

Negative amortization occurs when the payments made on a mortgage are less than the interest that accrues on the loan. As a result, the unpaid interest is added to the principal balance, causing the borrower to owe more over time instead of less. This situation can arise in various loan structures, especially those with lower initial payments, such as certain adjustable-rate mortgages or loans with deferred interest options.

In this context, if a borrower is only making partial payments that do not cover the total interest charged for a period, the additional interest compounds, leading to an increased loan balance. This is particularly concerning for borrowers, as it can create a scenario where they owe significantly more than their original mortgage amount, potentially resulting in financial strain or difficulties when trying to refinance or pay off the loan.