Finance
Negative amortization on a mortgage in Indiana occurs when:
AThe borrower pays extra principal each month
BThe monthly payment is less than the interest accrued, causing the unpaid interest to be added to the loan balance✓ Correct
CThe interest rate decreases each year
DThe borrower pays off the loan ahead of schedule
Explanation
Negative amortization occurs when the periodic payment is insufficient to cover the interest due, causing the interest shortfall to be added to the principal balance. This means the loan balance grows rather than decreases.
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Key Terms to Know
Amortization
The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Math Concepts
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