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.