Short answer: negative amortization means your regular payments do not cover all the interest, so the unpaid interest is added to what you owe and the balance goes up. Federal rules require a first-time borrower to get homeownership counseling before such a loan, ban it in high-cost mortgages, and keep it out of the qualified mortgage definition. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.
What it means
Regulation Z defines negative amortization as payment of periodic payments that will increase the principal balance under the terms of the loan, and a negative amortization loan as one, other than a reverse mortgage, with a minimum periodic payment that covers only part of the accrued interest (12 CFR 1026.18(s)(7)(v), eCFR, text up to date as of October 28, 2026, read October 30, 2026). The CFPB says the unpaid interest gets added to the amount you borrowed, that later payments covering principal and interest will be higher, and that you can end up owing more than your home is worth, which makes selling harder and can put you at risk of foreclosure (CFPB, last reviewed September 11, 2024, read October 30, 2026; this page may be out of date).
Example: the balance grows
This example is only for the math, with an example balance, rate and minimum payment, not terms from any lender. The loan is $300,000 at a fixed 6.0%, so the first month’s interest is $1,500.00. For 24 months the payment is $1,200.00, and the unpaid interest is added to the balance each month. Interest is rounded to the cent.
| Month | Starting balance | Interest | Payment | Unpaid interest added | New balance |
|---|---|---|---|---|---|
| 1 | $300,000.00 | $1,500.00 | $1,200.00 | $300.00 | $300,300.00 |
| 2 | $300,300.00 | $1,501.50 | $1,200.00 | $301.50 | $300,601.50 |
| 3 | $300,601.50 | $1,503.01 | $1,200.00 | $303.01 | $300,904.51 |
| Item | Example |
|---|---|
| Balance after 24 months | $307,629.60 |
| Increase over the original $300,000 | $7,629.60 |
| Payment for the last 336 months, repaying $307,629.60 (rounded to the dollar) | $1,892 |
| Payment if the loan had amortized from the start over 30 years | $1,799 |
In this example, the payment rises by $1,892 − $1,200 = $692 a month when the minimum payment period ends, and ends up $1,892 − $1,799 = $93 a month above the payment on a loan that amortized from the start, because a larger balance is repaid over fewer months.
Counseling for first-time borrowers
A creditor may not make a closed-end loan secured by a dwelling that may result in negative amortization to a first-time borrower unless it receives documentation that the borrower got homeownership counseling from a counselor or counseling organization that HUD has certified or vetted (12 CFR 1026.36(k)(1), eCFR). A first-time borrower is someone who has never had a closed-end loan or an open-end plan secured by a dwelling (1026.36(k)(2)(i)). Reverse mortgages and timeshare loans are excluded. The creditor may not steer you to a particular counselor (1026.36(k)(3)).
The official comments say the counseling must cover the risks and consequences of negative amortization, that a certificate, letter or email from the counselor showing you received it are examples of documentation, and that the creditor may process your application, such as ordering an appraisal, before it gets that documentation (Supplement I, comments 36(k)(1)-2 to -4, eCFR). To find a counselor, use the CFPB housing counselor search; see also the homeownership counseling list.
Banned in high-cost mortgages
A high-cost mortgage may not include a payment schedule with regular periodic payments that cause the principal balance to increase (12 CFR 1026.32(d)(2), eCFR). The comments say this does not stop reasonable increases from events the loan allows that are not tied to the payment schedule, such as a premium added when the creditor buys property insurance because you did not (comment 32(d)(2)-1). See high-cost home loan protections and force-placed insurance on a mortgage.
Not a qualified mortgage
Under the general definition, a qualified mortgage must have regular periodic payments that do not increase the principal balance, among other conditions (12 CFR 1026.43(e)(2)(i)(A), eCFR). For a negative amortization loan, the lender must check your ability to repay using the greater of the fully indexed rate or any introductory rate, and substantially equal monthly payments that repay the maximum loan amount over the term left on the date the loan is recast (1026.43(c)(5)(ii)(C)). The maximum loan amount assumes you make only the minimum payments for as long as allowed and the rate reaches its maximum at the earliest possible time (1026.43(b)(7)); recast means the end of the period when negatively amortizing payments are allowed (1026.43(b)(11)(iii)). See the mortgage ability-to-repay rule.
Where it shows on the Loan Estimate
| Where | What it shows | Rule |
|---|---|---|
| Product | The feature with its time period, such as “2 Year Negative Amortization, Fixed Rate” | 1026.37(a)(10)(ii)(A); comment 37(a)(10)-2.i |
| Loan Terms, Loan Amount | Under “Can this amount increase after closing?”, the maximum principal balance with “Can go as high as” or “Goes as high as”, and the due date of the last payment that may increase it with “Increases until” | 1026.37(b)(6)(i); comment 37(b)(6)(i)-1 |
Sources: 12 CFR 1026.37 (eCFR) and Supplement I. Only the first loan feature in the rule’s list is shown, and negative amortization comes first (1026.37(a)(10)(iii)); the comments say an interest-only feature whose payments do not cover all the interest is labeled as negative amortization (comment 37(a)(10)-2.ii). See interest-only mortgage basics.
Questions to ask the lender
- Can any scheduled or minimum payment be less than the interest due?
- What is the highest the balance can go, and until what date can it increase?
- When does the minimum payment period end, and what will my payment be after that?
- Is this a qualified mortgage?
- If this is my first home loan, what counseling documentation do you need from me?
Checklist
- Check the Product line and the Loan Amount row of your Loan Estimate for negative amortization.
- Pay at least all of the interest each month if you want the balance to stop growing.
- Compare the payment after the minimum payment period with your income today.
- Choose your own counselor; the lender may not steer you to one.
- Keep your counseling certificate or letter.
You can submit a complaint at consumerfinance.gov/complaint.
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Sources
- eCFR: 12 CFR 1026.18, Content of disclosures (Regulation Z), current text up to date as of October 28, 2026
- CFPB: What is negative amortization? (last reviewed September 11, 2024)
- eCFR: 12 CFR 1026.36, Prohibited acts or practices and certain requirements for credit secured by a dwelling (Regulation Z), current text up to date as of October 28, 2026
- eCFR: Supplement I to Part 1026, Official Interpretations (Regulation Z), current text up to date as of October 28, 2026
- CFPB: Find a housing counselor
- eCFR: 12 CFR 1026.32, Requirements for high-cost mortgages (Regulation Z), current text up to date as of October 28, 2026
- eCFR: 12 CFR 1026.43, Minimum standards for transactions secured by a dwelling (Regulation Z), current text up to date as of October 28, 2026
- eCFR: 12 CFR 1026.37, Content of disclosures for certain mortgage transactions (Loan Estimate) (Regulation Z), current text up to date as of October 28, 2026
- CFPB: Submit a complaint
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.