A situation (amortization that has a negative sign and effect) that arises when a mortgagor (a borrower) has an increasing outstanding mortgage balance despite all required periodical payment/ repayment are being made as per schedule. Negative amortization occurs with adjustable-rate mortgages that places a cap on periodical payment (e.g., monthly) as an amount (monthly payable) but not on the interest rate. That is, the mortgagor’s monthly payments will not be sufficient to cover all the interest owed to the mortgagee (the lender).

As a golden rule under personal finance, borrowers must not opt for such a type of mortgage that may result in a negative amortization situation.