Negative Amortization Limit
A provision in certain loan contracts that limits the amount of negative amortization that can take place. A loan negatively amortizes when scheduled payments are made that are less than the interest charge due on the loan at the time. When a payment is made that is less than the interest charge due, deferred interest is created and added to the loan's principal balance, creating negative amortization. A negative amortization limit states that the principal balance of a loan cannot exceed a certain amount, usually designated as a percentage of the original loan balance. Investopedia Says:
When a negative amortization limit is reached on a loan, a recasting of the loan's payments is triggered so that a new amortization schedule is established and the loan will be paid off by the end of its term. A negative amortization limit prevents a loan's principal balance from becoming too large, causing excessively large payment increases to pay back the loan by the end of its term. Related Terms:
Deferred Interest
Interest
Loan
Mortgage
Negative Amortization
Payment Option ARM
Payment Option ARM Minimum Payment
Recast Trigger |