Your loan will be "recast" when your loan reached a certain percentage of the original balance, or after a certain period of time. There are many different types of option ARM's, and the guidelines can vary significantly. When the loan is "recast" the lender is adjusting your payment to ensure the loan is paid off under the original loan term. For example if you take out a loan for $200,000 and your 30 year principal and interest payment (at 6.5%) is scheduled to be $1,265. If instead of making the 30 year payment you elect to make the minimum payment each of the first 5 years and defer the interest due, your may have a mortgage balance of $225,000. The lender at that time will calculate that you need to payoff $225,000 in 25 years. In order to do that you will need to make monthly payments of $1,520 per month, which will then become your new minimum payment.

It's important to take note that any difference between the interest accrued and the actual payment made is added to the loan balance. As always, speak with your mortgage professional to determine if this fits within your situation.

Most pay option arm loans will have a ceiling or a cap, to which you will be able to defer interest too. This is to protect you so that you do not become "upside down" on your home. Meaning, you will not owe more than is reasonable for you to be able to payoff. Remember your home is appreciating at all times, so the deferred interest will be able to be paid when you sell your home. If you do reach the cap, then the lender will make you begin to pay the principal down, again this is to protect you in the long run.

Pay option ARMS are popular with investors. The deferred interest means a lower monthly payment and more cash flow to use for other investments. The deferred interest will be paid either when the investor sells the property or when the loan recasts due to the amount of accrued interest. For an investor to use a Negative Amortization loan properly he should have a firm plan in mind at the beginning of the purchase that accounts for the deferred interest.

Negative Amortization - When mortgage payments do not cover the full amount of interest due, and the unpaid interest is added to the principal balance of the loan. Under standard amortization, the principal balance decreases with each payment.

If your first mortgage is geared for negative amortization it can be difficult to find a lender to provide a second mortgage.

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 means that your small loan payment you have loved for the past 5 or 10 years doubles if you incurred to much negative amortization.

Many real estate investors who purchase properties for their rental incomes often use mortgages with negative amortization feature. Loans with "neg am" feature offer the lowest monthly payment options, which in turn improves landlords' cash flow situations.

Negative amortization, also known as deferred interest, will allow a home-owner the opportunity to use their equity for other purposes such as investing or home improvement. When a mortgage loan reaches the recast period (from 5 to 10 years depending on the lender) the property will have most likely appreciated in value naturally or through improvements.

On a Negative Amortization loan, the interest rate that the other options (Interest Only, 30 Year Fully Amortized and 15 Fully Amortized) other than the lowest payment are based off of adjusts every month depending on the index it's based off of.