Which term specifically relates to the change in loan payments when negative amortization occurs?

Which term specifically relates to the change in loan payments when negative amortization occurs?

• A. Recapitalization
• B. Recasting
• C. Refinancing
• D. Reconciliation

Answer: (B)

The term that relates specifically to the change in loan payments when negative amortization occurs is recasting. When negative amortization takes place, the balance of the loan can increase because the payments being made are not sufficient to cover the interest, resulting in the unpaid interest being added to the principal balance. Recasting is a process where the lender recalculates the monthly payments based on the new loan balance after a certain period or after a borrower makes a significant payment. This results in lower monthly payments adjusted to reflect the new principal balance, which may have been artificially inflated by the accumulated unpaid interest. In this context, recasting allows borrowers to manage their payments more effectively after experiencing negative amortization, ensuring that future payments align more closely with the actual loan balance. This is significant because it enables borrowers to avoid further increases in the principal balance, which could lead to more severe financial consequences if left unaddressed.

The term that relates specifically to the change in loan payments when negative amortization occurs is recasting. When negative amortization takes place, the balance of the loan can increase because the payments being made are not sufficient to cover the interest, resulting in the unpaid interest being added to the principal balance. Recasting is a process where the lender recalculates the monthly payments based on the new loan balance after a certain period or after a borrower makes a significant payment. This results in lower monthly payments adjusted to reflect the new principal balance, which may have been artificially inflated by the accumulated unpaid interest.

In this context, recasting allows borrowers to manage their payments more effectively after experiencing negative amortization, ensuring that future payments align more closely with the actual loan balance. This is significant because it enables borrowers to avoid further increases in the principal balance, which could lead to more severe financial consequences if left unaddressed.