Payment Shock

Payment Shock

A very large increase in the payment on an ARM that may surprise the borrower.

See Adjustable Rate Mortgage/How the Monthly Payment on an ARM Is Determined/Negative Amortization ARMs.

The term is also used to refer to a large difference between the rent being paid by a first-time home buyer and the monthly housing expense on the purchased home.

References in periodicals archive ?
These borrowers are potentially susceptible to payment shock, the firm said, since many of them may not be prepared for the sometimes 60% increase in payment amounts once the pay-down period starts.
The company said these borrowers are possibly susceptible to payment shock, as many of them may not be ready for the sometimes 60% hike in payment amounts once the pay-down period starts.
But while tracker mortgages may be a bargain now, homeowners could face a payment shock when rates go up again - as they inevitably will.
The value of this shock is not yet known when the interbank market is open; hence, a bank's demand for reserves in this market is affected by the distribution of the payment shock and not the realization.
The group added that any payment shock was also generally more than outweighed by increases in earning.
By extending the initial interest rate that homeowners paid during the fixed-rate period of their hybrid ARM loan terms, the potential for payment shock may be mitigated, thereby potentially reducing the risk of default.
The agencies are concemed that borrowers may not fully understand the risks and consequences of obtaining products that can cause payment shock, particularly adjustable rate mortgages.
On the other hand, interest rates are rising again and payment shock may be an issue for some this year as their existing fixed or discounted deals expire.
That payment shock could in some ways undermine your homeownership.
But choose a bad loan product now and the future could bring some monthly payment shock that might result in the loss of the home, he said.
Most observers seem to agree that only a small percentage of ARM borrowers are likely to experience significant payment shock.
The combination of declining equity, rising delinquencies, growing payment shock risk and the application of Fitch's updated criteria led to further negative rating actions on prime RMBS transactions in Fitch's latest ratings review.