(Pronounced: NEGH-ah-tive am-ohr-tih-ZAY-shun)

Negative amortization is the process by which a loan’s principal balance increases on a month-over-month basis. 

This is in contrast to a “typical” amortization schedule in which the principal balance decreases.

Negative amortization is an optional feature on some home loans. 

These mortgages are usually referred to by the brand names “Option ARM”, “Pick-a-Payment”, or “Payment Option ARM”. 

Many industry veterans collectively call refer to these types of mortgages as “Neg-Am” loans.

When a Neg-Am mortgage statement arrives each month, the homeowner can choose his preferred payment structure. 

  1. Pay the minimum balance due only
  2. Pay the interest due only
  3. Pay the principal + interest payment on a 30-year amortization schedule
  4. Pay the principal + interest payment on a 15-year amortization schedule

Choice #1 is like making a “minimum payment” on a credit card. It is the only option that adds to the principal balance so, therefore, it is the only negative amortization option of the four payment choices.

In this sense, negative amortization is a choice and not a certainty.

In the early 2000s, Neg-Am loans grew popular as home affordability products.  Many homeowners made the minimum payment each month and found that their mortgage balance had swelled. 

Some of these homeowners lost their homes.

Because of their complex structure and potentially devasting consequences, NegAm home loans have been dubbed “nightmares” by several media publications. 

However, many sophisticated homeowners have successfully applied NegAm loans to help meet their financial goals.

Like all home loans, NegAm products are a better fit for some homeowners than others.  Some likely candidates include:

  • 100%-commissioned salesperson who want better control over tax deductions
  • Owners of multiple investment properties who want better control over cash flow
  • Investors who seek leverage in real estate and who clearly understand market risk

Homeowners with questions about negative amortization loans should seek counsel from a qualified mortgage professional.


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