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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  2. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  3. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  4. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  5. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  6. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
Trading Center