1. What is Negative Amortization?

Negative amortization occurs when loan payments are insufficient to cover the interest due, causing the unpaid interest to be added to the principal balance. This results in the loan balance increasing over time rather than decreasing.

2. How Does This Calculator Work?

The calculator uses the negative amortization formula:

Where:

• \( Previous \) — Previous loan balance (USD)
• \( Interest \) — Interest due for the period (USD)
• \( Payment \) — Actual payment made (USD)

Explanation: When payment is less than interest due, the difference gets added to the principal, increasing the loan balance.

3. Understanding the Results

Details: A positive result indicates the loan balance has increased (negative amortization). A negative result means the payment exceeded interest and reduced the principal.

4. When Does Negative Amortization Occur?

Common scenarios: Payment-option ARMs, graduated payment mortgages, or any loan with minimum payments that don't cover full interest.

5. Frequently Asked Questions (FAQ)

Q1: Is negative amortization always bad?
A: It can be risky as it increases debt, but may be strategic in certain situations like temporary cash flow issues.

Q2: What's the maximum negative amortization allowed?
A: Typically 110-125% of original loan amount, depending on loan terms and regulations.

Q3: How does this affect total interest paid?
A: Significantly increases total interest since you're paying interest on previously unpaid interest.

Q4: Can negative amortization loans convert?
A: Many convert to standard amortization after a set period or balance cap is reached.

Q5: Are there alternatives to negative amortization?
A: Yes, including interest-only loans or refinancing to more affordable payment terms.