• Index + Margin x outstanding loan balance (assuming no deferred Interest) = the "full payment", Principal & Interest "PI" payment, "Scheduled payment" or "Fully-Indexed payment."
   

•  The "Scheduled payment" (also called the "Full", "P.I." or "Fully-Indexed" payment) can NEVER give you deferred interest (negative amortization.)  The Scheduled payment is a Principal and Interest pmt. based upon the fully-indexed Rate (Index + Margin) X outstanding loan balance; you are allowed to make this pmt. every month beginning with month *two.  If you make this payment, your loan balance would always decline regardless of the movement of the Index. This is because your loan balance could be lower each month, and this lower balance would then be re-calculated by the new monthly Index + Margin; moreover, the Lender could re-adjust your next "Scheduled payment" higher to compensate for the higher Index. Therefore the yearly 7.5% "Payment Cap" would never "come into play"; moreover, your future Scheduled pmts. could actually decrease even if the Index were increasing.

Here is an example:

Let's assume a $250,000 mortgage balance on 01/01/04, an Index of 1.229%, and a fixed Margin of 2.75%, creating a fully-indexed Rate of 3.979% or 2.75% + 1.229%.  This would create a "Scheduled payment" of $1,190.51.  Now let's assume on 02/01/04 the Index increased by 0.05 bps. to 1.234%, or a fully-indexed Rate of 3.984% (2.75% +1.234%.)  Because the new loan balance would be lower, i.e., $249,638, the new monthly payment would actually drop by $1.72  ($249,638 x 3.984% = $1,188.79.) - (There have been times {when the Index was decreasing over a long period of time} when the Lender had to lower the "Scheduled pmt." because too much rapid amortization was occurring. In that event, the Lender would begin to lower the "Scheduled pmt" on a yearly basis, via the yearly 7.5% payment cap until it was back on its normal amortization period, i.e., 30 or 40 years.) 

• Every month a mortgage statement will be mailed to you, (even though you can make payments electronically. The "Scheduled payment" (as with all the other pmt. options) will pay your house off in 30 years or less.
   

* Some Option ARM programs have a 3-month "Starting Rate" which is a fixed PI payment; therefore your Scheduled pmt. option would begin in month four.