A California borrower has a deed of trust with a 'negative amortization' feature. What does negative amortization mean?
Correct Answer
D) The monthly payment is less than the interest due, causing the unpaid interest to be added to the principal balance
Negative amortization occurs when the monthly payment is insufficient to cover all the interest owed. The unpaid interest is added to the principal balance, causing the loan balance to grow over time instead of shrinking.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
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