Borrowers may face a
payment shock if they cannot refinance the balloon amount, for example, due to a default of PSAD, or sell the car for the balloon amount in a downturn of the used-car market.
The final requirement enables borrowers to benefit from the reduction in early-year payments by using an adjustable-rate mortgage (ARM) without the risk of a large
payment shock at rate resets.
However, a downturn in the economy, loan modifications, service transfers, loss of the deferral status and other less-than-ideal scenarios can lead to
payment shock for the borrower and potential losses for the lender.
For most borrowers, monthly payments will change from interest-only to amortizing, which may pose interest rate risk from concentrated resets and rising market rates,
payment shock from additional principal payments, and refinancing difficulties because of lower property values and conservative lending underwriting standards.
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.
"With the bulge of HELOCs hitting a potential
payment shock in about a
But while tracker mortgages may be a bargain now, homeowners could face a
payment shock when rates go up again - as they inevitably will.
It's trying belatedly to turn the circle the other way - lower rates means more of us can pay our mortgages and reduce the "
payment shock" to mortgage holders reaching the end of deals.
At the end of the day, after the interbank market has closed, each bank experiences another
payment shock, P, that affects its end-of-day reserve balance.
The tough environment has hit thousands of mortgage borrowers, many of whom are facing "
payment shock" when current mortgage deals expire.
The group added that any
payment shock was also generally more than outweighed by increases in earning.