In the context of mortgage amortization, negative amortization occurs when:
Correct Answer
B) The monthly payment is less than the interest due, causing the principal balance to increase
Negative amortization occurs when monthly payments are insufficient to cover the interest due, causing unpaid interest to be added to the principal balance. This increases the loan balance over time rather than reducing it. While not typical in traditional fixed-rate mortgages, this concept is important for understanding payment adequacy and loan structure.
Why This Is the Correct Answer
Negative amortization occurs when monthly payments are insufficient to cover the interest due, causing unpaid interest to be added to the principal balance. This increases the loan balance over time rather than reducing it. While not typical in traditional fixed-rate mortgages, this concept is important for understanding payment adequacy and loan structure.
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