A borrower's variable rate mortgage has reached the trigger point. The outstanding balance is now higher than the original mortgage amount despite making regular payments. What is the most likely explanation and immediate consequence?
Correct Answer
B) Negative amortization has occurred; the borrower must increase payments or pay a lump sum
When a variable rate mortgage reaches its trigger point, it means interest rates have risen so much that the fixed payment amount no longer covers the interest portion, resulting in negative amortization where the principal balance increases. The borrower typically must increase their payment amount or make a lump sum payment to restore positive amortization.
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A borrower's mortgage reaches the trigger rate on their variable rate mortgage. What does this mean?
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