YOUR MORTGAGE : Negative-Amortization Stirs Unease : Debt: With property values flat and pay raises modest, balances on some ARMs keep growing despite payments.

Many lending experts have always been wary of “negative-amortization” mortgages, those home loans that can grow bigger--not smaller--with every monthly payment that you make.

But now some of those experts seem downright scared about these offbeat mortgages because property values are flattening out and borrowers’ incomes aren’t rising much.

“Prices aren’t going up like they were a few years ago, and people are getting pretty small pay increases,” said Bruce Norman of Diamond Bar-based First Mortgage Corp., a mortgage banking company that doesn’t make negative-amortization loans.

“You can’t depend on property appreciation to bail you out of a bad loan anymore.”

Added Tom Gau, a partner in the Torrance-based financial-planning firm of Kavesh & Gau: “A lot of people have negative-amortization loans and don’t even know it. They might be in for some nasty surprises.”

Most fixed-rate loans don’t have the potential to negatively amortize, but many adjustable-rate mortgages do. It usually occurs when a “rate cap” or “payment cap” prevents the lender from raising your monthly payment fast enough to keep up with rising interest rates.

To illustrate how negative amortization works, let’s say that you took out a 30-year, $100,000 ARM with a starting rate of 9%. Your monthly payments for principal and interest would total about $805.

Say that one year later, rates have zoomed to 13%, but a clause in your original loan documents prevents the lender from raising your monthly payment by more than 7.5%. Your new payment would be limited to $865--about $241 short of the amount that would be needed to fully amortize the loan at the new 13% rate.

The shortfall would be added to the outstanding balance of your loan, meaning that you’d owe more money, not less, with each passing month.

Financial planner Gau said negative-amortization loans aren’t so dangerous when property values are soaring, borrowers are getting big pay increases or both. That’s because your equity is building or your paycheck is growing at a much faster rate than your loan balance is rising.

“The problem is that now prices are flattening out and pay increases are generally small,” he said. “The outstanding balance (of negative-amortization loans) is rising a lot faster than most people’s home values and incomes.”

Still, there are some benefits to loans that have the potential of negative amortization.

First, the low introductory rate that most of these loans carry make the mortgages easier to get. You don’t have to earn as much because your beginning payments will be relatively low.

In addition, most lenders who make the loans offer their borrowers an option to pay a little bit extra each month to avoid having the loan negatively amortize. It’s much like the way that credit card vendors work: You can make the minimum payment that’s due, or you can pay more to reduce your finance charges.

“I think that these loans benefit consumers,” said Richard H. Deihl, chairman and chief executive of lending giant Home Savings of America. “If the borrower has a little extra cash, he can make a little larger payment and avoid having the loan negatively amortize.

“But if the borrower gets into a financial bind, he can just make the minimum payment until his cash-flow situation improves. He wouldn’t have that flexibility if he took out a fixed-rate loan with fixed monthly payments.”

AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of Oct. 12, 1990.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.94% 10.28% 10.13% 8.18% 8.46% California 10.12 10.451 10.29 8.36 8.32 Connecticut 10.06 10.37 10.24 8.29 8.50 Wash. D.C. 9.80 10.13 9.98 7.86 8.22 Florida 9.91 10.26 10.10 8.20 8.34 Mass. 10.13 10.50 10.34 8.39 8.72 New Jersey 9.96 10.29 10.14 8.12 8.55 N.Y. Metro 10.05 10.39 10.24 8.25 8.59 New York 10.15 10.48 10.34 8.34 8.64 N.Y. Co-ops 10.36 10.65 10.55 8.54 8.86 Pa. 9.70 10.10 9.91 7.97 8.06 Texas 9.74 10.06 9.92 8.27 8.35

SOURCE: HSH Associates, Butler, N.J.

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