Which factor can lead to negative amortization in a reverse mortgage?

Negative amortization occurs when the balance of a loan increases, rather than decreases, over time. This situation can arise in reverse mortgages when the amount of interest accruing on the loan exceeds the growth of the home equity. In the context of a reverse mortgage, the borrower does not make monthly payments on the principal or the interest. Instead, interest is added to the loan balance, and as this compounding interest continues to accumulate, it can surpass the equity of the home itself, especially in cases where the home appreciates at a slower rate than the interest accumulates.

This dynamic can result in the total loan balance growing larger than the home's value, which is a defining characteristic of negative amortization. Therefore, in reverse mortgages, when compounding interest surpasses the growth of home equity, it directly leads to a negative amortization scenario, making it the correct factor associated with this outcome.