Negative amortization loans, also known as deferred interest loans, payment option ARMs (adjustable rate mortgages), neg am loans and other titles, are loans with interest rates based on MTA, COFI and other indices that have payment adjustment caps in addition to interest rate adjustment caps.

With interest rates rapidly rising, these have been an item of controversy because of how they can result in loss of equity and an increased mortgage balance. However, neg am purchase loans and refinances can be good for self-employed people with cash flow issues, business owners with unpredictable incomes and for people whose income is mainly from commissions or bonuses, as well as experienced investors who know how to make money from the lower initial mortgage payments.

Neg am loans are also good for investment properties. You can use a neg am loan by comparing it to a 30-year fixed-rate loan, then investing the difference in a high-yield stock, mutual fund or other diversified portfolio. A person who owes little on their mortgage can cash out on home equity and make money by refinancing into a negative amortization mortgage with an interest only payment option, similar to the following BankRate.com example: Tom Muldowney, a certified financial planner with Savant Capital Management in Rockford, Ill., says he has a 75-year-old client with a $45,000 mortgage. She could pay it off with a check if she wanted to. But she has a 4.75 percent interest-only loan, the interest is tax-deductible, and she's in the 38.6 percent bracket.

With the tax deductibility, she's borrowing at an effective rate of less than 3 percent and making more money than with a well-diversified investment portfolio. Real estate speculators may use negative amortization loans to invest in properties in areas where they believe home prices will increase rapidly then quickly sell at a profit. Other real estate investors may use neg am mortgages to buy rental properties with positive cash flow then use the money they save to invest in other high cash flow properties.

In conclusion, negative amortization loans should be viewed more as short-term loans--a temporary solution if income is temporarily reduced, or if the hold period is short term to minimize cash or as an investment strategy for experienced investors and real estate speculators and experienced investors.