Question:

What is deferred interest (negative amortization) ARM?

Answer:

Most homebuyers are well aware what is deferred interest (negative amortization) ARM. Statistics shows that consumers shift away from conventional mortgages to non-tradtional ones, such as the Neg Am loans, also called Option ARMs, or Pick-a-Pay adjustable rate mortgage loans.

In short, deferred interest or negative amortization ARM loans are adjustable rate mortgages that offer several payment plans to the borrower with one of them leading to negative amortization. Negative amortization is accrued interest that is unpaid and, therefore, added to the loan balance.

An ARM (adjustable rate mortgage) is basically a mortgage with interest rate that can be valid for several months to several years and then adjusts to an ARM index plus margin set by the lender. Needless to say, ARMs can have a very low monthly payment that can go up or down as adjustment time arrives.

When to use deferred interest (negative amortization) ARM?

Deferred interest (negative amortization) ARM loans are recommended to young families who have a good reason to expect raise in their income within several years. In that case, deferred interest (Neg Am) ARM loans can keep the initial payment low during the critical early years of homeownership.

Also, the minimum payment on deferred interest (negative amortization) ARM home loans is only an option - that is, as soon as you can afford it, you could switch to making fully amortizing payments, unless you expect to move out, or refinance.

Beside homeowners expecting a raise in their income within several years, deferred interest (negative amortization) adjustable rate mortgages are often preferred by investors - the minimum payment option frees up cash that could apply better to investments with higher return rather than to a house they are not keeping anyway.

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