A loan with Negative Amortization (NegAm) has a minimum monthly payment that does not cover all accrued interest. Each month’s deferred interest gets added to the principal. The result is in an increasing loan balance and interest due on interest. A NegAm loan is typically a monthly adjustable rate mortgage (ARM) with built-in triggers that will cause the payment to rise significantly if too much negative amortization accrues. Sounds great, right?

NegAm ARMs have been around for decades, but originally, underwriters looked for borrowers making a large down payment with the financial wherewithal to balance the inherent risks. They had a cult following with real estate investors and others who could benefit from a highly flexible payment plan.

As real estate boom of the 2000s took off, NegAm ARMs grew in popularity and availability. Marketed as “pick-a-payment” loans, the idea was that although you could pay a payment with negative amortization, you wouldn’t always do so. When the mortgage crisis hit and housing prices started to tumble these loans became exhibit A for the excesses of risky lending.

NegAm ARMs are likely a relic of the past. So many of them wound up in foreclosure that lenders are unlikely to offer them again. If they do ever become available again, they will not eligible for the liability protections offered to lenders under the Qualified Mortgage rules, making them even risker.