Question:

What is Option ARM negative amortization?

Answer:

Option ARM negative amortization occurs when people choose to make the minimum payment, unpaid deferred interest accrues to the principal and interest starts accumulating (in most cases) on the deferred interest.

If you forget to make additional payments, as many people do, you are in for a surprise.

Option ARM Negative Amortization Produces Larger Debt Than You Started With

If you have an Option ARM loan with 70% LTV, when negative amortization exceeds 80% the recast may occur and require fully amortizing payments plus mortgage insurance to be paid. Or, the recast may occur after 110% or 125% of the initial loan value is reached, or if any other terms specified in the agreement require accelerated recalculation.

Unlike the minimum payment of an Option ARM leaves you with negative amortization, the other payment options - fully amortizing and interest-only - do not increase your loan balance.

If you don't have a specific reason to use the minimum payment option for, make sure you avoid it, to save yourself future trouble.

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