"NEGATIVE AMORTIZATION, ADJUSTABLE RATE MORTGAGE, ARM. An INTEREST BEARING DEBT is said to be AMORTIZED when all liabilities which include the principal and interest are discharged by a sequence of usually equalpayments. An adjustable rate mortgage ARM is a debt in which the simple annual or nominal interest rate ANNRATE% can vary over the term of the loan in years orNUMYEARS. MONTHPAY is the monthly payment. VALUDEBT is the debt's value. OUTSTPR is the value of debt at the start of period PERIOD#. INTDUE is the interest due at the end of the period. REPAIDPR is the repaid principal at the end of the period. If the ARM has a fixed monthly payment, the possibility exists that an increase in the nominal rate will result in interest due which isgreater that the monthly payment MONTHPAY. Such a condition is called NEGATIVE AMORTIZATION because money is borrowed from the equity to supplement the monthlypayment required to meet the interest debt. NEGAMOR% is the nominal annual rate for ZERO AMORTIZATION (REPAIDPR=0). If the nominal annual interest rate exceeds NEGAMOR% then the loan negatively amortizes and the debt begins increasing. *** Answers to Problems *** (c) PCSCC, Inc., 1993 (a) Move the cursor to ANNRATE% and set it to 7.5 by typing 7.5 (enter). Next set NUMYEARS to 30, PERIOD# to 1 and VALUDEBT=100,000. Move the cursor to PERIOD# and set it to 60 then 120 then 240. The results are NEGAMOR% equals 8.39, 8.86, 9.65 and 14.17. Type any key to exit. ||(a) What are the negative amortization rates for a $100,000, 30year, 7.5% loan after payments # 1, 60 (5 yrs), 120 (10 yrs), 240 (20 yrs)? Type comma key to see answer. Type (F2) to return to application file."
