Loan Screens > Account Information Screen Group > ARM Information Screen > Rate Caps & Negative Amortization tab > Negative Amortization field group

Entry: User, checkbox

F/M: Yes

Mnemonic: LNPCAP

Screen: Loans > Account Information > ARM Information > Rate Caps & Negative Amortization tab

A checkmark in this field indicates that you want to use a payment cap. No checkmark indicates that no payment cap is to be used and amounts entered in the fields controlled by this field will be ignored.

When a new P/I is calculated, payment capping controls the amount the new P/I can be increased to. This is done by multiplying the current P/I by the percent in the P/I Increase Limit field. If the newly calculated P/I is higher than allowed, the P/I will become the allowed amount.

Example: The Current P/I is $1,000 and the P/I Increase Limit is 5%. $1,000 x .05 = $50.00. The new P/I cannot be increased by more than $50.00 ($1,050).

Note: When the P/I is "capped," negative amortization comes into effect. This means that more interest is due on a loan than is collected with the payment. The difference between the interest that is due and what interest is paid is added to the principal balance of the loan at the time the payment is posted; this is known as "deferred interest." Interest then starts accruing on the higher principal balance. The next month (if the loan is set up for monthly payments), the process continues and the principal balance is again increased by the unpaid interest amount. This continues until either a new P/I is calculated or the maximum principal balance is reached.

Note: The P/I may be calculated to be exactly the same as the interest due amount. In this scenario, the principal balance would not be increased; however, the principal balance will not be reduced as payments are posted; this is known as "interest-only payments."

Refer to the additional fields in this section because various options affect the above scenarios.

The following fields are affected when you turn on the Use Payment Cap option.

P/I Increase Limit

Frequency to Ignore P/I Limit

P/I Change Counter

P/I Change Frequency

P/I Decrease