Effects

• The major effect of a dual index ARM is that negative amortization is possible. This is when a person's monthly payments only pay some of the interest and none of the principal. Therefore, the principal grows with each month rather than shrinking, even though payments are being made.
  
  

Why Borrow?

• The reason for a dual-indexed ARM is because Latin American countries have histories of high inflation. High inflation creates high interest rates, and without something protecting borrowers from this they would not get loans at all.
  
  

Why Lend?

• Apart from encouraging people to invest where they otherwise wouldn't, lenders also use dual ARMs because they assume that the value of the house will rise over time. Therefore, the bank will eventually be paid back some way or another. Unfortunately, this is an assumption---property prices do not necessarily rise all the time.