What is Reverse Amortization/Negative Amortization?

Reverse amortization (also known as negative amortization) is a type of loan amortization where the monthly payments don’t cover the accrued interest. The unpaid interest is added to the loan balance, which causes the balance to increase over time.

Mortgage products such as pay-option ARMs, graduated payment mortgages, and reverse mortgages typically utilize negative amortization. 

The Pay-Option Adjustable-Rate Mortgage (ARM)

Many people have a bad impression of reverse amortization because of the risky pay-option ARMs (also known as “pick-a-pay” loans) that were available prior to the 2008 financial crisis.

Pay-option ARMs gave borrowers multiple payment options to choose from, including a low minimum payment that didn’t cover all of the interest. The unpaid interest was added to the loan balance, which caused it to increase over time.

Pay-option ARMs were originally intended for savvy business owners who wanted additional cash flow management options. Unfortunately, many home buyers were attracted to the low minimum payments and used them to “afford” homes that were otherwise unaffordable.

When home values fell during the Great Recession, many homeowners with pay option ARMs owed more than their homes were worth. This was a big problem because the homeowner was on the hook for the shortage if their home couldn’t sell for enough to pay off the entire loan balance. Many homeowners with pay-option ARMs found themselves tens of thousands of dollars underwater on their mortgages with no means to settle up the shortage.

Graduated Payment Mortgage (GPM)

Some graduated payment mortgages also use negative amortization.  Graduated payment mortgages have low starting payments that don’t cover all of the interest. The unpaid interest is added to the loan balance, which causes it to increase over time. As the years pass, the payments gradually increase to cover all of the interest, then both principal and interest so the loan pays off in full at the end of the loan term.

Graduated payment mortgages are intended to help people more easily become homeowners. The payments start off low to help people get into the home, then gradually increase as the borrower’s income increases. 

Home Equity Conversion Mortgage (HECM)

The most common negative amortization mortgage in the United States is the FHA-insured HECM reverse mortgage. The HECM enables homeowners 62 and over to access a portion of their home’s equity without giving up ownership of the home or taking on a mortgage payment.

The HECM is a non-recourse loan, which is what sets it apart from riskier negative amortization loans like the pay-option ARM and the graduated payment mortgage. means the most that will ever have to be repaid is the value of the home. FHA covers the shortage if your home isn’t worth enough to pay off the entire balance.

How Reverse Amortization is Calculated

Our reverse amortization calculator assumes an annual interest rate with interest accruing monthly. The first reverse amortization formula we use is to calculate the monthly rate:

Annual Rate / 12 = Monthly Rate

Once we have the monthly interest rate, the reverse amortization calculator multiplies it by the loan balance:

Monthly Rate * Loan Balance = Accrued Interest

The accrued interest is added to the loan balance, which becomes the new balance used to calculate interest for the following month.

Are Reverse Amortization Loans Risky?

A reverse amortization loan can be risky if it doesn’t have basic protections for the homeowner.

The pay-option ARMs of the 2008 financial crisis were full recourse loans. This meant the homeowner had to come up with the shortage if their home didn’t sell for enough to pay off the entire loan balance. Obviously, this made pay-option ARMs very risky in an environment where home values were falling.

The HECM reverse mortgage also uses negative amortization, but it’s a non-recourse loan insured by FHA. If home values fall and you owe more than the home is worth, FHA will cover the shortage.

Reverse amortization loans can be risky, but they’re not always risky. It just depends on how they’re set up.

Reverse Mortgage Calculator

Are you looking for a reverse mortgage calculator monthly payment, line of credit, or lump sum estimate? If so, you can find our calculator here.

How to use Our Reverse Amortization calculator

Our reverse amortization calculator (or negative amortization calculator) is very easy to use. Simply enter the interest rate, the starting loan balance, and the number of years to amortize on the first page, then click the “Calculate” button.

The results page will display the reverse amortization schedule, which shows how the loan balance changes over time.

Frequently Asked Questions