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In the past few years an alarming number of people have financed their homes with a mortgage that goes by many names. It is called the Flex Pay mortgage. Sometimes it is called the Pay Option Loan. Other times it is called the MTA Loan. Just to name a few.

The salesperson will try to dazzle you with a "Guaranteed Low Minimum Payment of only $900.00 on your $250,000.00 loan" and you will say, "how can that be?".

They will not tell you the details, instead they will hammer down the low payment being fixed for five years. Many people go for it thinking that in 5 years they will either have sold or will be in better credit standing to refinance their loan.

But there is a giant detail that they all too often "forget" to tell you. It is called Negative Amortization.

What is Negative Amortization you ask? Simply put, it means that as you make that first $900.00 payment on your new $250,000.00, the principal balance on your new loan will INCREASE instead of decrease.

Usually you will get a low interest rate of something ridiculous like 1.75%, which they try to tie into their statement of the PAYMENT being fixed for 5 years. But do not be fooled because that 1.75% rate only lasts for the first month. Then you rate will fluctuate each and every month by adding a Margin to an Index.

True, your minimum PAYMENT will remain the same, but the interest rate will be increasing to over 8% and if you only pay the $900.00, that will not even cover the interest for the month.

So what happens to the interest you didn't cover with that $900.00? It was added to the total amount of your loan.

After one year of this, the average person can expect to owe %5,000.00 MORE than they originally borrowed.

This loan usually gives you four payment options each month.

1. the Minimum Payment - This results in negative amortization

2. the Interest Only Payment - This will be on average $500.00 more than the payment they sold you on.

3. the 15 Year Amortization - This will be triple the payment they sold you on but it does reduce your principal the same amount as if the loan had a 15 year term.

4. the 30 Year Payment - this will be almost double the minimum payment and reduces principal the amount needed to pay off in 30 years.

For a disciplined person whose income is seasonal, this type of loan can be beneficial. However to the common person this loan should be avoided because it is too easy to pay just that minimum payment and end up losing valuable equity in your home.

Learn more about this author, Kent Clark.
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