A minimum payment option ARM mortgage typically involves what?

A minimum payment option adjustable-rate mortgage (ARM) is characterized by its structure that allows the borrower to make a payment that is often less than the monthly interest due on the loan. As a result, when the minimum payment is made, the unpaid interest gets added to the principal balance of the loan instead of being paid off. This process leads to negative amortization, where the outstanding balance of the loan increases over time rather than decreases, even though the borrower is making regular payments.

This feature can be appealing to borrowers seeking lower initial payments, but it comes with the risk of the loan balance growing unexpectedly. Understanding negative amortization is crucial for borrowers as it can lead to a larger payoff amount when the loan eventually adjusts or is due. Thus, the nature of a minimum payment option ARM directly correlates to the phenomenon of negative amortization, which is why this option is the most accurate description of such a mortgage.