Question:

How to calculate payment shock?

Answer:

Sometimes borrowers end with mortgage payments that are significantly higher than what they have been previously paying. This unpleasant situation is commonly known as payment shock.

It can result from many things - such as the end of a fixed-rate period, a significant increase of the interest rate in an adjustable-rate mortgage loan, expiration of the temporary start (teaser) interest rate, end of an interest-only period, etc.

Many mortgage products, for example payment option ARMs, carry the risk of payment-shock. Therefore, underwriters should be aware of the payment shock risk and include it in their evaluation when approving a mortgage loan.

Calculating Payment Shock

In order to calculate the payment shock, start with the new housing payment and divide it by your old/existing payment (PITI). The result will be the percentage increase.

For example, if your new payment is $2,100 and your existing payment is $1,200, then the percentage increase will be 2,100 / 1,200 = 1.75 or 75% increase.

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Common misspellings: mortage and morgage