Finance
What is 'negative amortization' and why is it risky for Nevada borrowers?
AWhen interest rates decrease, reducing monthly payments
BWhen monthly payments are insufficient to cover accrued interest, causing the loan balance to increase over time✓ Correct
CWhen a borrower makes extra principal payments each month
DA fee charged by Nevada lenders for early payoff of a mortgage
Explanation
Negative amortization occurs when a borrower's scheduled payment is less than the interest accruing on the loan. The unpaid interest is added to the principal balance, causing the loan to grow over time — the borrower owes more than they originally borrowed. This was common with Option ARM loans during the 2000s housing bubble in Las Vegas. It's risky because equity erodes, and borrowers can end up deeply underwater. Nevada saw massive foreclosures partly due to these products.
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