Beware Negative Amortization

Negative amortization is a nasty situation when it comes to loans for real estate. It is also confusing to many people. In its simplest form, negative amortization occurs when your payments on the loan are not sufficient to cover the monthly interest. This, of course, means the total amount owed on the loan grows. The “leftover” interest usually rolls into the principal of the loan and interest then grows on that. Many interest only and hybrid loans can put you in situations where negative amortization can occur. Avoid them like the plague!