Negative Amortization Explained

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Negative amortization, also known as NegAm, occurs when the payment made on a loan is less than the amount of interest charged on the loan for that period. This makes the loan balance larger, rather than paying it down. For example, let's say the total mortgage payment on a home is $600, and out of that $600, $250 goes to interest. If the borrower only makes a $200 payment to prevent the account from becoming severely overdue, for that month the balance on the loan actually went up. This is because the difference in the payment made and the payment owed is added to the balance of the loan.

Amortization refers to paying debt over time, through predetermined payments. An amortization schedule will have a list of all the payments, the amount of the payment that gets applied to the principle balance of the loan and the amount of the payment that goes to interest. Over time, the payment amount will stay the same, but the amount that goes to principle and interest changes. In the first years of a loan, the majority of it goes to interest, rather than the principle balance of the loan.