Is negative amortization always a "negative" thing for the borrower? Not necessarily, it depends on the borrower and their individual situation. In many cases, the benefits of additional cash flow and lower mortgage payments far exceed the liability of deferring some of the interest. As your mortgage professional, I can advise you as to what indicators in your personal finances may point to whether negative amortization could be a benefit for you.

Most pay option arm loans have a payment option that will usually incur negative amortization. Pay Option ARM loans usually have 3 or 4 payment options each month. The lowest payment option usually does not cover enough to cover the interest of the loan, thus resulting in negative amortization. Negative amortization is when your loan balance actually increases instead of lowering or staying the same.

Most negative amortization loans will readjust after the loan amount becomes 110%-120% of the value of the property which could be as soon as three to five years in some markets which would result in much higher payments than anticipated.

The obvious drawback to negative amortization is that your principal balance increases and in a down real estate market, your loan may exceed your property value.

Another term used for negative amortization is deferred interest. These types of mortgages generally have very low minimum payments, as well as other payment options such as an interest only payment, a 30 year amortizing payment and a 15 year amortizing payment.

In a Negative Amortization loan make sure to ask about the "Recast" term. Usually will be a 5 year or 10 year. This is very crucial because you could incur payment shock at beginning of the 5th year or 10th year. Basically meaning that your small loan payment you been loving for the past 5 or 10 years doubles if you incurred to much negative amortization.