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January 19, 2023
A payment shock is a sudden rise in a person's debts and liabilities that may drive them to default on their financial responsibilities. Simply put, payment shock happens when a person is suddenly required to pay more in monthly debt than they can afford on their salary. This notion is frequently used to highlight how much extra a borrower must pay to a lender when taking out a mortgage. Payment shock is also dangerous with variable-rate or teaser-rate mortgage products, such as payment option adjustable-rate mortgages (ARMs) and interest-only loans with a balloon payment.