Payment Shock

AAA

DEFINITION of 'Payment Shock'

The risk that a loan's scheduled future periodic payments may increase substantially. Payment shock can be the result of several things, including the expiration of an initial or temporary start interest rate (sometimes known as a teaser rate), the end of a fixed-interest rate period, the end of an interest-only payment period, an increase in an adjustable-rate mortgage's fully indexed interest rate or the recasting of a payment option ARM.

INVESTOPEDIA EXPLAINS 'Payment Shock'

Many popular mortgage products, such as payment option ARMs, carry a great deal of payment-shock risk. Consumers are drawn to these mortgages because of the relatively low initial monthly payments they offer. All financial decisions, including the choice of a mortgage, should be made by carefully considering the risk versus the reward. Risks must be identified and measured through insightful analysis. When risks, such as payment shock, are recognized and measured, they can be managed or avoided.

RELATED TERMS
  1. Payment Option ARM

    A monthly adjusting adjustable-rate mortgage (ARM) which allows ...
  2. Scheduled Recast

    A recalculation of the remaining amortization schedule of a mortgage ...
  3. Initial Interest Rate Cap

    The maximum amount the interest rate on an adjustable-rate loan ...
  4. Deferred Interest

    The amount of interest that is added to the principal balance ...
  5. Mortgage Recast

    A feature in some types of mortgages where the remaining scheduled ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  4. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  5. How much risk is associated with subprime mortgages?

    A large amount of risk is associated with subprime mortgages. Since the mortgages are specifically for people who do not ... Read Full Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    The financial consequences of filing for bankruptcy are substantial and can be long-lasting. They include impacts on your ... Read Full Answer >>
Related Articles
  1. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  2. Home & Auto

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
  3. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  4. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Home & Auto

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  6. Credit & Loans

    Calculating Interest Expense

    Interest expense is the cost of borrowing money.
  7. Economics

    What is a Subprime Mortgage?

    Subprime mortgages are offered to borrowers with low credit ratings, usually 600 or below.
  8. Home & Auto

    Strategies To Buy The Perfect Vacation Home

    Ask yourself these six questions to make the right decision about a vacation property.
  9. Economics

    How Does a Lien Work?

    A lien gives a creditor the legal right to seize and sell property, then use the proceeds to pay off a borrower’s debt.
  10. Retirement

    Is Your Mortgage Robbing Your Retirement?

    If you picked the mortgage with the lowest possible monthly payment, you may be blowing what could be your retirement money on mortgage interest.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!