FinanceIntermediateDelaware Exam
What is 'negative amortization' on a mortgage loan?
AWhen the borrower makes extra principal payments
BWhen monthly payments are insufficient to cover the interest due, causing the loan balance to increaseCorrect
CWhen the interest rate decreases below zero
DWhen the property value falls below the loan amount
Why When monthly payments are insufficient to cover the interest due, causing the loan balance to increase Is Correct
Answer B: When monthly payments are insufficient to cover the interest due, causing the loan balance to increase
Negative amortization occurs when the scheduled payment is less than the interest accrued, causing the unpaid interest to be added to the loan balance. Over time, the borrower ends up owing more than the original loan amount.
Exam Tip: Finance
Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.
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