The sad reality is that some lenders market the Option ARM as if that low, low payment rate is the actual interest rate and applicants flock to this type of financing without a true understanding of negative amortization. Even worse is the lack of understanding by many participants in the mortgage industry. Inherent in the Option ARM is the pre-determined limit to the amount of negative amortization permitted. That limit may be anywhere from 10% to 25% of the original loan balance. Regardless of any payment or rate caps, when the negative amortization increases the mortgage balance to that pre-determined threshold then all bets are off. The borrower can no longer pay that low, low payment rate. The borrower will also no longer have the option of paying an interest-only payment. The borrower will then be faced with having to pay a fully amortizing payment at the fully indexed rate. In a worse case scenario, this could result in an almost tripling of the minimum payment required before the end of the second year.

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