Negative Amortization Limit


DEFINITION of '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.

BREAKING DOWN 'Negative Amortization Limit'

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.

  1. Interest

    The charge for the privilege of borrowing money, typically expressed ...
  2. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  3. Deferred Interest Mortgage

    A mortgage loan that allows the borrower to make minimum payments ...
  4. Loan

    The act of giving money, property or other material goods to ...
  5. Deferred Interest

    The amount of interest that is added to the principal balance ...
  6. Negative Amortization

    An increase in the principal balance of a loan caused by making ...
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