Negative amortization occurs when the payments on a loan are less than the interest owed, causing the loan balance to increase over time. This typically happens with certain adjustable-rate mortgages where monthly payments cover only part of the interest due. As a result, unpaid interest is added to the loan’s principal, and the borrower ends up owing more than the original loan amount. Negative amortization can lead to higher monthly payments in the future and is considered a risky loan feature.