Which of the following is FALSE regarding negative amortization?
A)It can result in a decrease to the borrower's equity in the property
B)It usually increases default risk
C)It usually has a lower interest rate than a conventional loan
D)It usually results in a lower DCR

Question

Quizplus · Accepted Answer

Negative amortization loans typically have a higher interest rate than conventional loans, as they pose a higher risk to the lender. A lower interest rate would make the loan more attractive to borrowers, but it would also increase the risk to the lender. A lower debt service coverage ratio (DCR) may occur with negative amortization loans because the monthly payment does not cover the full interest owed, leading to a lower cash flow to cover operating expenses. Negative amortization can result in a decrease to the borrower's equity in the property because the unpaid interest is added to the loan balance, increasing the overall amount owed. Negative amortization is also associated with an increased risk of default because the borrower is not paying down the principal balance of the loan.

Which of the Following Is FALSE Regarding Negative Amortization