Define: Negative Amortization

Negative amortization occurs when the monthly payment on a loan is not sufficient to cover the interest charges, resulting in the unpaid interest being added to the loan balance.

Negative amortization is generally legal, but it may be subject to certain regulations and restrictions depending on the jurisdiction and the type of loan.

Negative amortization can provide short-term relief by reducing the monthly payment amount. However, it can lead to long-term financial consequences due to the increased loan balance and interest charges.

Negative amortization is most commonly associated with adjustable-rate mortgages (ARMs) and certain student loans, but it can potentially occur on any loan with a variable interest rate or deferred interest feature.

To avoid negative amortization, it is important to carefully review the terms of the loan agreement and understand how the interest rate and payment structure may change over time. Making larger payments or refinancing the loan may also help prevent negative amortization.

While negative amortization itself may not directly lead to foreclosure, it can contribute to financial difficulties and make it more challenging to keep up with loan payments, potentially increasing the risk of foreclosure.

Lenders are generally required to disclose the possibility of negative amortization and provide clear explanations of how it works in loan documents, including the Truth in Lending Act (TILA) disclosures.

Whether you can sue your lender for negative amortization depends on various factors, including the specific circumstances, any misrepresentations or violations of consumer protection laws, and the applicable legal remedies available in your jurisdiction.

Negative amortization itself does not directly impact your credit score. However, if it leads to missed or late payments, it can have a negative effect on your creditworthiness.

Negative amortization should be carefully considered before taking out a loan. It is important to understand the potential risks and consequences associated with negative amortization and evaluate whether it aligns with your financial goals and capabilities. Seeking professional advice from a lawyer or financial advisor can be beneficial in making an informed decision.