General Mortgage Knowledge · 20% of the SAFE exammedium
Correct answer: Negative amortization — the monthly payment does not cover all interest due, so unpaid interest is added to the principal balance
Negative amortization occurs when the borrower's monthly payment is less than the interest due. The unpaid interest ($1,450 - $1,200 = $250) is added to the principal balance, causing the loan amount to grow over time rather than shrink. In this example, the balance increased from $300,000 to $300,250. This is the opposite of normal (positive) amortization, where each payment reduces the principal. Negative amortization is prohibited in Qualified Mortgages under the ATR/QM rule. A balloon payment is a large lump sum due at the end of a loan term — it's a different concept entirely. Deferred interest does exist in some programs but the unpaid interest is not waived; it accumulates. Payment "Positive amortization — the borrower is paying down..."RMs are the most common product associated with negative amortization risk.
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