The basic concept of this theory implies that homeowners can choose whatever monthly payment they wish to make after meeting the minimum requirement. The difference between the interest rate they were suppose to pay and were paying was added back to the principal balance.
Obtaining this was relatively easy during the early 2000s due to the increased demands. With little regulation, homeowners easily qualified for the minimum requirement. All they had to do was provide a suitable proof of their income and contact either a bank or a mortgage lender. They could carry the exercise on their own by calculating the amount with the help of the calculator (online as well).
At first, it seemed a viable option, given that homeowners wanted to pay low interest rate in the initial years, and as their income sources improved, they were in a position to pay higher amounts. However, with the bubble finally bursting in 2008, it resulted in increased mortgage defaults and foreclosures.
Before getting yourself in the mess, it is important that you totally understand the concept. If you have taken an adjustable rate mortgage, then negative amortization makes sense, given the volatility of the market.
Lets consider a simple example. For instance you had to make $600 payments each month under normal amortization circumstances for a 30-year, fixed–rate loan. If you maintained the amount, you will have to make no payments at the end of 30 years. However, if you made payments in the region of $ 500, then the difference will be added to your loan balance.