Virginia State Real Estate Exam Practice Question
Negative amortization occurs when
Correct Answer: C
Rationale: Negative amortization happens when the payments made on a loan are less than the interest that accrues over time. This means that instead of reducing the loan balance, the unpaid interest gets added to the principal, increasing the overall debt.
Option A, increasing the ARM margin, does not directly relate to negative amortization; it affects the interest rate but not the payment structure. Option B, interest-only payments, can lead to negative amortization if they are insufficient to cover accrued interest, but it is not the sole condition. Option D, adjusting the index, influences interest rates but does not inherently cause negative amortization.
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