What is a Negative Amortization Mortgage?

Negative amortization occurs when the payment made by the borrower does not cover the amount of the interest incurred.  The difference is added to the loan amount.

Traditionally, negative amortization loans have been used by lenders to allow for a lower monthly mortgage payment in the beginning of the loan period.  

So, why would someone want this type of loan?  Well, it may be an option for a couple where one person is presently employed and the other is in school, graduating in a year or so and will be employed, bringing the household income substantially higher.

In the 1980's when interest rates very very high, negative amortization loans offered borrowers the ability to keep their payments low and ride the market hoping that in a few years, they could refinance into a lower interest rate.

In our current market of low mortgage interest rates and lenders having stricter lending guidelines, negative amortization loans are very rare; however, there are still some lenders offering the product.