Finance
A negative amortization loan in South Dakota occurs when:
AThe interest rate is below the rate of inflation
BThe monthly payment is less than the accrued interest, causing the loan balance to increase✓ Correct
CThe borrower makes principal-only payments
DThe lender charges compound interest on a simple interest note
Explanation
Negative amortization occurs when the minimum payment doesn't cover all accrued interest. The unpaid interest is added to the principal balance, causing it to grow over time.
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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.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
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.
Math Concepts
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