Negative Amortization

A typical monthly payment the home borrower makes on a loan includes Principal and Interest, and in some cases, may also include the amount of Insurance and Taxes in case of an escrow account.

Certain lenders offer an option to the borrower to make a monthly payment less than the interest amount accrued on the loan. The payment may or may not cover all the interest due on the loan and the unpaid interest is added back to the unpaid balance resulting in the loan increasing over time.

The concept of the principal amount raising over time despite making agreed, scheduled, timely payments on a loan is known as negative amortization.

Most lenders discourage negative amortization loans and borrowers must well educate themselves and look for altrenative loan products for comparison before committing to loans that result in negative amortization.

About the Author: Ahsan Bashir is an experienced Tax Consultant based in Irving, Texas, with over 25 years of expertise spanning Taxation, Accounting, Business Lending and Mortgage, Risk Management, Business Insurance, and Business Consulting. Through his firm, Z-Tax & Accounting, he provides comprehensive financial services including Individual and Business Tax Preparation, Bookkeeping, Payroll Processing, and Business Consulting. As an Enrolled Agent authorized to practice before the Internal Revenue Service (IRS), and an IRS Certifying Acceptance Agent (CAA), Ahsan Bashir delivers trusted, professional solutions tailored to the unique needs of both individuals and businesses.

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