Let's talk some more about negatively-amortizing ARMs and why they are not universally bad mortgage products, as Business Week would have us believe.

To reach agreement on that point, however, we need to agree on something else:

Financial instruments -- including mortgages -- are sophisticated and heavily nuanced. 

Before ever choosing a financial product to meet short- and long-term financial goals, homeowners should speak with a qualified adviser about the pros and the cons of that choice.

Hopefully, you all agree -- it's just good sense.

Negatively-amortizing home loans are terrific products for certain people.  For example, because the loan product allows homeowners to defer mortgage interest, a commissioned salesperson with a lousy year can use it to maximize tax deductions.

Because a commissioned salesperson's income can fluctuate from year-to-year, so can his tax bracket.

Unfortunately, most salespersons don't know what kind of year they're having until the year is halfway over. 

By paying the "minimum required payment" each month, the salesperson is actually adding unpaid mortgage interest to his loan balance month after month.

This is similar to a credit card minimum payment -- it satisfies the creditor but the balance due is higher the next month.  The onus to pay the bill in full, after all, is left to the debtor.

After making 12 months of minimum payments, the salesperson can evaluate his year and decide whether or not to pay the deferred interest.

If he earned a strong income, it would make sense to pay the interest because that would likely increase his tax deductions in the current year.

If he earned a weak income, claiming those tax deductions could be somewhat pointless because what good are tax deductions if you're two or three tax brackets below your usual levels?  Instead, carry the interest forward into the next year and claim it then.

This is a sophisticated strategy, obviously, and can apply to a lot of Americans:

• Home builders
• Stock traders
• Real estate agents
• Attorneys working on contingency

Where Business Week makes its story, though, is in highlighting people that are not commissioned and who just wanted "low payments".

Many people choose negatively-amortizing loans because it helps them to maintain a certain lifestyle.  This is the wrong way to apply NegAm loans to financial planning.

In the end, applying the proper mortgage product to meet payment objectives comes down to basic fiscal literacy and surrounding yourself with advisers you can trust.

Negatively-amortizing loans are not toxic mortgage products -- they might just be toxic for you.

Negatively amortizing home loans get a lot of bad press.  Some of it is deserved; most of it is not.

If you've never heard of NegAm loans, maybe you know them by their more popular, "brand" names:

• Option ARM
• Pick-a-Payment ARM
• Deferred Interest Option Loan

The basic concept of a NegAm loan is that the homeowner can choose what his monthly payment will be from among several choices.  One of those choices is a "minimum required" payment that is less than the true amount owed. 

The difference between the two payments is added to the loan's principal balance.

In math, the choice to NegAm looks like this:

(New Loan Balance) = (Current Loan Balance) + ((True Monthly Mortgage Payment)-(Minimum Mortgage Payment Required))

In the hands of the wrong homeowner, NegAm loans can be is very dangerous.  Imagine borrowing $400,000 for your home and then owing $440,000 when you sell it. If you planned for that additional debt load and managed your mortgage with purpose each month, no problem!  Unfortunately, too few people actually plan or manage their mortgage.

  Many of these people in the latter group were enticed by the "minimum payment rate" and treated the NegAm products as an affordability product.

And that's the worst possible use of a mortgage allowing deferred interest.  Deferring interest is a case of pay the lender now, or pay the lender later.  There is no "affordability" in that game -- just delaying the inevitable.

So, when the press pans NegAm loans like Washington Mutual's Option ARM, it neglects the fact that negative amortization is a choice!  That choice is the reason why these negatively amortizing loans have names like Option ARM and Pick-a-Payment -- the lender is not telling the borrower how to pay back the mortgage.

Remember: there are two groups of borrowers that use NegAm loans for home financing.  One group has a mortgage plan, the other group has a spending plan.  And we've already discussing the latter group.

For members of the former, NegAm loans can be the perfect mortgage product.  With payment choices each month, there is a tremendous amount of flexibility for self-employed or commissioned employees. 

Business isn't always strong and it's nice to have a "minimum required payment" to help manage seasonal income fluctuations and other aberrations.

Or, for traders at the CBOT or CBOE whose income may be tied to a large year-end bonus, the ability to defer mortgage interest can be a tax planning choice.  If the annual income is small, for example, the benefits of claiming a mortgage interest tax deduction is small, too.

It may be better for traders to push deferred interest into next year and then pay their NegAm loan "current" once their income is more certain.  When that happens, the interest brought current become tax deductible in the current year.  In this manner, a trader can claim tax deductions when they are most valuable.

It could be the difference between claiming mortgage interest tax deductions from the 15% tax bracket versus the 33% tax bracket.

See, the press often assumes (wrongly) that every client in a NegAm will eventually owe more money than was originally borrowed when it's time to sell, resulting in a nasty short sale, or foreclosure.  This is a Doomsday Scenario. 

By contrast, there are many homeowners using negatively-amortizing mortgage products to manage their personal cash flow and to help meet their other financial objectives.

NegAm loans are not inherently evil.  They're only a problem when homeowners choose to let them be.