That is, if the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will be added to the loan balance, so the loan balance increases. However, one also has the option to pay the minimum monthly payment, or the fully amortized amount due.

The advantage of negatively amortizing loans is that one can control cash flow with a relatively stable payment, take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now because of natural inflation.

With most ARMs, the interest rate can adjust every 6 months, once a year, every 3 years, or every 5 years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with...
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