Which change causes negative amortization?
Correct Answer
D) Making a permitted payment that is less than accrued interest so unpaid interest is added to principal
Why this is correct: Negative amortization occurs when the scheduled payment is less than the interest that has accrued for that period. The unpaid interest is then added to the principal balance, causing the loan balance to increase instead of decrease. Why the other choices are wrong: "Paying more than the scheduled amount toward principal" is wrong; this accelerates principal reduction, the opposite of negative amortization. "Reducing the note rate while keeping the payment unchanged" is wrong; lowering the rate typically decreases interest due, which could allow more of the payment to go to principal, preventing negative amortization. "Paying exactly the fully amortizing amount" is wrong; this covers all interest and some principal, ensuring positive amortization. Exam tip: Negative amortization = Payment < Accrued Interest. It makes the loan balance grow.
Why This Is the Correct Answer
Why this is correct: Negative amortization occurs when the scheduled payment is less than the interest that has accrued for that period. The unpaid interest is then added to the principal balance, causing the loan balance to increase instead of decrease. Why the other choices are wrong: "Paying more than the scheduled amount toward principal" is wrong; this accelerates principal reduction, the opposite of negative amortization. "Reducing the note rate while keeping the payment unchanged" is wrong; lowering the rate typically decreases interest due, which could allow more of the payment to go to principal, preventing negative amortization. "Paying exactly the fully amortizing amount" is wrong; this covers all interest and some principal, ensuring positive amortization. Exam tip: Negative amortization = Payment < Accrued Interest. It makes the loan balance grow.
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