Over time, the payments for these loans must be adjusted upward to catch up with fully indexed interest rates and/or paydowns (amortization) of the balance owed, often significantly, which sometimes results in what some call “payment shock.” Sometimes borrowers can refinance out of these loans, but that may cost them a serious prepayment penalty and reduce the amount of equity that they have built up in their home.
The complexity of these products contrasts with traditional thirty-year fixed-rate loans, in which consumers have equal monthly payments that are sufficient to cover the accrued interest and pay down the principal, and with which borrowers are generally familiar. 4  BIS Review 7/2007  To be clear, nontraditional mortgages certainly serve a useful purpose when used appropriately.