Definition
Payment shock is a significant jump in monthly payments, typically when ARM initial periods end or interest-only periods convert to amortization. Your payment might jump $300-500+ monthly. It can render mortgages unaffordable if not planned for.
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Payment shock commonly occurs when ARM initial periods end and the adjusted rate applies, or when interest-only mortgages begin principal amortization. Large payment increases can jeopardize affordability and risk default. Borrowers must plan for payment shock when choosing these loan types.
Pro Tip
Carefully plan for payment shock with ARMs or interest-only mortgages; ensure you can afford the maximum possible payment.
Example
An interest-only ARM has a $1,200 payment for 5 years; when it resets to 7% and begins amortization, the payment jumps to $2,100.