Negative Amortization

In depth

Negative amortization, or neg-am, occurs when monthly payments do not even cover the interest due, with the unpaid interest added to principal. The borrower's loan balance grows. Misconception: neg-am is not always predatory; it can be used responsibly in short-term construction loans or income-deferred situations. Practically, neg-am is heavily restricted on consumer mortgages under the Dodd-Frank Qualified Mortgage rule and the Higher-Priced Mortgage Loan rules. In seller-financed residential deals, neg-am structures are generally prohibited or strongly discouraged. Sellers using deferred interest should disclose the cap on negative amortization, the recast date, and the eventual payment shock. Buyers should run the math on a worst-case payoff balance before signing any neg-am structure.