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The use of Adjustable Rate Mortgages to get into homes cheaply has created a new phenomemon that even the Federal Reserve is recognizing, Payment Shock. The use of adjustable rate loans and even more dangerously, the Option ARMs, consumers who were lacking foresight when buying their homes are now facing extremely higher payments on their mortgages.

This reaction is called Payment Shock in the industry and is becoming more and more widespread as purchasers are not seeing the increase in property value that they expected.

Last week, Susan Schmidt Bies, a governor on the Federal Reserve Board, expressed the Fed’s growing concerns regarding “payment shock.” In the vernacular of real estate professionals, the term once referred to the jolt experienced by first-time homebuyers when they started making mortgage payments that were significantly higher than their rent.
Now, payment shock usually pertains to the unpleasant heart palpitations felt by a homeowner who has just internalized that his adjustable-rate mortgage payment is taking a big leap.
So-called option ARMS might be the scariest beast in the exotic mortgage jungle. Homeowners are lured by initial interest as low as 1 percent, while the underlying interest is rolled into the balance. The lender pounces when the balance reaches a predetermined amount — typically 110 percent or 125 percent of the original mortgage — and the borrower must make payments at the true interest rate on the full balance.

Real estate boom gives way to ‘payment shock’.

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