ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Negative amortization

Updated on March 29, 2009

You Always Pay More With Negative Amortization

Amortization refers to the process by which the periodic (usually monthly but could be set weekly, bi-weekly or other time period) payments are such that the loan will be paid off within the designated time period. The scheduled payment on an amortized loan is calculated such that it is large enough to cover both the interest due and an amount to reduce the balance due on the loan.

Negative amortization refers to a situation where the payment is not sufficient to pay the interest due, let alone any principal. This results in the unpaid interest being ADDED to the balance of the loan making the interest due on the next payment GREATER than was due on the previous payment. In this situation, the borrower's balance INCREASES with each payment.

With Normal Amortization the Loan is paid in full when scheduled - Here is an example of a 30 year fixed rate mortgage

Here is the same 30 year fixed rate mortgage with the payment set at 1 cent less than the interest due - NOTE that after 30 years the borrower has paid almost $

Same $100,000 mortgage but skipping the first payment - NOTE it took 22 monthly payments for loan to start amortizing and after making 360 monthly payments tota

Examples of Negative Amortization

Here are some examples of situations in which negative amortization may occur:

Teaser Payments – loans on which the payment is scheduled to increase over the life of the loan and on which the initial payments will be less than the amount necessary to amortize the loan. This type of loan is targeted at people whose current incomes are such that they would not qualify for the loan, so the amount of the initial payments are reduced to allow them to qualify. The assumption is that the person's income will be increasing in the future, and the payments are scheduled to adjust upward as well in the future. Of course, the increased future payments will have to be high enough to amortize the new, higher balance that has resulted from the initial negative amortization. A word of caution is in order here in that the adjustable payment schedule is based upon the term of the loan and not on the borrower's actual increases in income. In other words, the payments rise as scheduled and, if the anticipated increases in income do not occur at the same time, the borrower could find himself in a situation where he cannot afford the new payment.

Skipping payments – If a borrower skips one or more payments, the addition of those payment's interest to the loan balance may result in the interest due on the the new, higher, balance being greater than that succeeding payments. As a result, even though all future payments are made on time, none of them are sufficient to pay the full amount of interest due resulting in a slow, but steady, increase in the loan balance with each succeeding payment. If late charges are also added to the loan balance this will magnify the negative amortization.

Making less than a full payment - Paying less than the full amount due with one or more payments will either slow the amortization (if the amount paid is equal to or greater than the interest due but less than the full amount) resulting in money still being due at the end of the contractual loan period or result in negative amortization if the amount paid is less than the interest due.

Rate increase without Payment increase – Some adjustable rate loans have provisions for the rate to increase every time the index on which the rate is based increases, but the payments themselves to adjust according to a fixed schedule. During periods of rising interest rates this can often result in the rate increasing one or more times before the next payment increase. If this happens and the interest rate increase is such that the new interest due is greater than the payment, negative amortization will occur. This is common on credit cards where the finance charge is adjustable. Often the rate will increase immediately after the monthly bill is sent and if the card holder waits until the payment due date (which is usually 30 days after the date on the bill) to make the minimum monthly payment, that payment probably will not be sufficient to pay the new, higher, finance amount resulting in the balance on the next month's bill being larger even though no new items were charged to the card. The negative amortization in this case can be avoided, or at least minimized, by making the payment as soon as the bill is received rather than waiting until it is due.

Negative amortization should always be avoided, as it quickly multiplies the total amount the borrower pays over the life of the loan. On most loans, borrower's are allowed to pay more than the required monthly payment, so, even though you might have an initial low teaser payment on your loan or have an adjustable rate where the payment doesn't automatically adjust when the rate changes, it is a good idea to include something extra on these loans. Even if the extra amount is not sufficient to cover all of the unpaid interest, paying whatever extra amount you can afford will at least reduce the effects of negative amortization.


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)