Bow tie loans are basically are short-term variable rate loan that defers any unpaid interest charges above a pre-determined interest rate. A bow-tie loan rolls any interest due into the loan principal in a long-term loan from a bank lender or investor.In short, it is a variable-rate loan in which unpaid interest charges above a predetermined interest rate are deferred. A variable-rate loan is a loan in which the interest rate fluctuates in response to market interest rates. So, when bow tie loans are issued, a predetermined interest rate is set and whenever the market rate goes up past that rate, interest payments for investors are deferred until the end of the loan’s maturity.
Top White Curve
It is an adjustable-rate, jumbo product that is available nationwide wherever negative amortization is permitted.
For example, let’s say a company wants to take out a bow tie loan of $100,000, current interest rates are 15% and the lending company has set a limit interest rate of 22%. At 22%, the company is paying $22,000 in interest payments. In the event that interest rates rise above 22% to, say, 26%, the interest payments will rise from $22,000 to $26,000. In this case, the company is still liable for $22,000 of interest payments, but the difference of $4,000 ($26,000 – $22,000) is deferred until the loan’s maturity date.