Negative Amortization
Direct definition
When a loan's monthly payment doesn't cover the interest due, causing the balance to grow.
Written by the Vabasso Mortgage Editorial Team · Reviewed against agency and federal sources · Read our editorial policy for how we research and review mortgage content
Plain-English explanation
Neg-am can happen with option ARMs and some payment structures where you pay less than accrued interest. Unpaid interest gets added to principal.
Why it matters
Negative amortization erodes equity and can lead to payment shock when full amortization kicks in.
Where you may see it
- Loan disclosures
- ARM program terms
- Amortization schedule
A real-world example
A minimum payment leaves $200 of interest unpaid; the balance grows by $200 that month.
Educational and illustrative only
A common misunderstanding
Negative amortization doesn't mean the loan is in default — it's a designed feature of certain loan structures where the balance can grow rather than shrink.
Ask Vabasso AI
This glossary provides general educational information. Mortgage terminology, qualification methods, forms, timelines, fees, program rules, and legal meanings may vary by lender, investor, loan program, property, occupancy, state, and transaction. Definitions do not represent loan approval, legal advice, tax advice, or a commitment to lend.
- Author
- Vabasso Mortgage Editorial Team
- Reviewed by
- Vabasso Mortgage Licensed Advisory Team
- Last reviewed
- July 30, 2026