The American appetite for low payment mortgage programs continues to be strong. When you think about it, it's no surprise that these products have gained popularity. Fed Chairman Alan Greenspan responded to the 9/11 attacks by aggressively lowering short term rates, making adjustable rate mortgages difficult to turn down. Some monthly adjustables carried fully indexed rates as low as 2.75 percent. Knock off 25 percent for the interest tax deduction and some folks were paying only about two percent for their loan.

Exacerbating the demand for low payment mortgages has been skyrocketing home values. Despite low interest rates, housing has become less affordable. In fact, this morning I read in the newspaper that housing prices in Northern Virginia have doubled on average since 2000. And in many counties and cities around the country, home prices have doubled in the last year or two.

Low short term rates and rising property values is a perfect recipe to create an appetite for low payment mortgages.

Depending upon the lender, there are lots of catchy names for these products. Here are a few: "Option ARM," "Choice Pay," "Personally Tailored Mortgage," the "Mortgage Stretch," "Cash Flow ARM," "Flex Pay," "Advantage ARM," the list goes on and on. Most of these products share the same general features. Let's go over the important part.

These loans carry an adjustable rate that is tied to some index. The index could be the One year Treasury Bill, the Monthly Treasury Average, the London Interbank Offering Rate (LIBOR), or the COFI (Cost of funds Index), to name a few. Each index is different and should be examined before taking out an ARM, but the point is that ARMs carry a low initial rate, allowing for a more affordable mortgage. The downside? The rate could go up at some point in the future, depending upon the length of the initial fixed period and the interest rate environment.

The loans allow multiple payment plans. Typically, the borrower will receive a monthly statement that outlines the current interest rate and loan balance. It will also show four different payments based upon different criteria.

The first payment option is typically the "minimum payment" which is calculated based upon some pre-determined criteria. The minimum payment is usually less than the interest charged for the month, resulting in "negative amortization," or the more politically correct term, "deferred interest." It's very important to understand that making payments with negative amortization results in a rise in loan balance, to cover the interest not paid.

The second option is usually the "interest only" payment, which is equal to the interest charge for that month - the loan balance stays the same.

The third and fourth options carry a 15 and 30 year amortization. The payments are higher, but the principal balance is curtailed every month.

Some critics in the media charge that these loan programs are irresponsible because it exposes the borrower to the possibility of higher interest rates and increased debt in the future. This is certainly true, but as with anything else, we can quote Thomas Jefferson: "The price of freedom is responsibility." Flexible payment plans for a mortgage is a fine thing as long as it's used responsibly.

However, having said that, there are some lenders who deserve some sharp criticism for the methods they use in marketing these programs. These programs can certainly be complicated and it's important for any consumer considering a flexible payment mortgage to fully understand it. It doesn't help if they receive misleading or inaccurate information from mortgage advertisers or the ill-informed media. That's the subject for the next column. Stay tuned.

Published: February 3, 2005

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.