What Is an Interest Shortfall?

An interest shortfall is the accrued interest due that remains after a borrower has made their monthly payment. This can lead to negative amortization on some adjustable rate loans. Negative amortization is a financial term referring to an increase in the 澳洲幸运5官方开奖结果体彩网:principal balance of a loan caused by a failure to cover the interest due on that loan.

How Interest Shortfalls Work

Interest shortfalls are a feature of 澳洲幸运5官方开奖结果体彩网:adjustable-rate mortgages (ARMs), in which the interest rate applied to the outstanding balance varies throughout the life of the loan. When rate caps limit monthly loan payments, the homeowner’s payments may be less than the actual interest due. This unpaid interest increases the outstanding principal balance of the loan, which is called 澳洲幸运5官方开奖结果体彩网:negative amortization.

While negative amortization protects borrowers from 澳洲幸运5官方开奖结果体彩网:payment shock associated with a sudden increase in the ARM interest rate, it will take longer to fully amortize the loan. If interest rates continue rising, the equity in the home will decline rather than rise, unless the price of the house rises. Most mortgages have limits on interest shortfall, to protect both borrower and lender. A 澳洲幸运5官方开奖结果体彩网:lifetime cap is the maximum upper limit interest rate allowable on an ARM. The cap applies to the life of the mortgage. This cap informs a borrower of the ma🙈ximum interest rate they could pay during the life of the loan. 

Interest Shortfalls in MBS

In the mortgage backed security (MBS) market, interest shortfalls occur when the interest distributed is less than the amount of interest accrued as a result of mortgage prepayments. Interest shortfalls occur when fees and expenses associated with troubled loans reduce the amount of interest available to be paid on a mortgage backed security. If there’s an interest shortfall, interest is deferred, with 澳洲幸运5官方开奖结果体彩网:subordinate classes usually the first to be affected wit꧟h more senior tranches get repaid first.