negative amortization - in variable interest rate or adjustable rate mortgages that contain a payment cap or limit, negative amortization occurs when the index rate rises to a level that, together with the addition of the margin, creates a monthly payment amount greater than that allowed by the payment cap. The difference between the interest amount that would have been payable in the uncapped payment over the capped payment is added to the outstanding loan balance thereby creating a growing loan balance, rather than an amortizing or decreasing loan balance. Negative amortization may occur in virtually any note or loan arrangement if the lender and borrower agree to it and the circumstances of its occurrence are clearly set forth. Naturally, the parties should be aware of the usury statutes in their jurisdiction. See also adjustable rate mortgage, amortization, balloon payment, index, interest cap, margin, payment cap, and variable rate mortgage.

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