When mortgage payments do not cover the full amount of interest due, and the unpaid interest is added to the principal balance of the loan. Under standard amortization, the principal balance decreases with each payment.

Negative amortization can only arise on ARMs with one or more of the following features:

-The initial payment does not cover the interest due.
-The interest rate adjusts more frequently than the monthly payment.

On a negative amortization loan, the interest rate that the other options (Interest Only, 30 Year Fully Amortized and 15 Fully Amortized) other than the lowest payment are based off of adjusts every month depending on the index it's based off of.

Most pay option arm loans have a payment option that will usually incur negative amortization. Pay Option ARM loans usually have 3 or 4 payment options each month. The lowest payment option usually does not cover enough to cover the interest of the loan, thus resulting in negative amortization. negative amortization is when your loan balance actually increases instead of lowering or staying the same.

The obvious drawback to negative amortization is that your principal balance increases and in a down real estate market, your loan may exceed your property value.

Most negative amortization loans will readjust after the loan amount becomes 110%-120% of the value of the property which could be as soon as three to five years in some markets which would result in much higher payments than anticipated.

Another term used for negative amortization is deferred interest. These types of mortgages generally have very low minimum payments, as well as other payment options such as an interest only payment, a 30 year amortizing payment and a 15 year amortizing payment.

Is negative amortization always a "negative" thing for the borrower? Not necessarily, it depends on the borrower and their individual situation. In many cases, the benefits of additional cash flow and lower mortgage payments far exceed the liability of deferring some of the interest. As your mortgage professional, I can advise you as to what indicators in your personal finances may point to whether negative amortization could be a benefit for you.

In a negative amortization loan make sure to ask about the "Recast" term. Usually will be a 5 year or 10 year. This is very crucial because you could incur payment shock at beginning of the 5th year or 10th year. Basically means that your small loan payment you have loved for the past 5 or 10 years doubles if you incurred to much negative amortization.

Many real estate investors who purchase properties for their rental incomes often use mortgages with negative amortization feature. Loans with "neg am" feature offer the lowest monthly payment options, which in turn improves landlords' cash flow situations.

If your first mortgage is geared for negative amortization it can be difficult to find a lender to provide a second mortgage.

Negative amortization, also known as deferred interest, will allow a home-owner the opportunity to use their equity for other purposes such as investing or home improvement. When a mortgage loan reaches the recast period (from 5 to 10 years depending on the lender) the property will have most likely appreciated in value naturally or through improvements.

Negative amortization is when the payment amount does not cover the interest accrued on the loan. The loan balance will increase due to this shortfall. negative amortization is also referred to as deferred interest.