Finance
What is 'negative amortization' and why is it risky for Pennsylvania homebuyers?
AWhen the interest rate decreases below the initial rate, reducing the monthly payment
BWhen the monthly payment is insufficient to cover accruing interest, causing the loan balance to increase rather than decrease✓ Correct
CWhen a borrower pays off their mortgage faster than the amortization schedule
DA tax consequence of deducting mortgage interest that reduces the net benefit of homeownership
Explanation
Negative amortization occurs when a borrower's monthly payment is less than the interest accruing on the loan, causing the unpaid interest to be added to the loan balance. The borrower owes more over time despite making payments. Negative amortization was common in certain exotic loan products before the 2008 financial crisis. Post-Dodd-Frank regulations restrict such products. Pennsylvania buyers should understand their amortization schedule before choosing a loan.
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