What does a negative amortization cap limit?

Prepare for the Minnesota Real Estate Salesperson Exam. Engage with flashcards and multiple choice questions, each with hints and explanations. Ace your exam!

A negative amortization cap is a feature in certain loan agreements that limits how much the total amount owed can increase when the borrower is only paying a portion of the interest on their loan. In a scenario where there is negative amortization, the loan balance can grow above the original amount because the unpaid interest is added back to the principal.

When the correct option states that the cap limits the total amount owed to 125% of the original loan, it means that under this provision, once the debt reaches 125% of the original loan amount, the lender will typically require the borrower to start making higher payments that cover both the interest and some principal, thus preventing the balance from growing further.

This concept is important for borrowers as it helps to protect them from an infinite increase in their debt, which could lead to financial distress. Knowing the cap ensures they are aware of their potential debt limit and can plan their finances accordingly.

Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy