I can think of three reasons for that. One of them or any combination of them could result in such an illogical at first glance situation:
• You made an extra payment towards the principal some time ago and now it’s taking effect. The balance has become so low, that even a higher rate cannot push the actual sum of the monthly payment to its previous margin.
• The PMI got cancelled by the lender. Under the provision of the 1999 Federal law, lenders are required to cancel private mortgage insurance on most home mortgage loans made after July 29, 1999 automatically when amortization has reduced the loan balance to 78% of the value of the property at the time the loan was made. An earlier cancellation at 80% of the property’s value is likely to happen only if initiated by the borrower himself.
• If the rate has increased, but the amount of your monthly payment remained unchanged or went up insignificantly and then froze at that level, you may be in trouble, because these are the symptoms of a monthly payment cap in action. Check your mortgage contract: Is your mortgage an adjustable rate mortgage? Does it carry a payment cap? If this is the case, you should immediately look for ways to avoid negative amortization, and fast, before it increases the outstanding balance of your mortgage and wastes a lot of the effort you have put into paying the debt off.

This very unpleasant situation is called negative amortization. The most likely causes are:
i) You have an adjustable rate mortgage with a payment cap that does not allow you to raise your monthly payment enough to match the new interest rate. As a result, your monthly payment is probably high enough to cover the principal part and some of the interest, but all the underpaid interest is added to the outstanding balance. The situation calls for emergency action!!!
ii) You have an option adjustable rate mortgage and you stick to the minimum payment option, even though the rate has changed. If you have ignored the raised rate for 2 years you are in big trouble, because most option ARMs carry a 7.5% a year minimum payment cap. Under such a limitation it is very problematic to catch up with the new rate and the debt it has already produced. The only way out of this is selecting some other option for your monthly payments immediately; otherwise negative amortization can increase your debt to a virtually unpayable amount.

This very unpleasant situation does require a considerable financial effort on your part, but it can be resolved eventually to your advantage. The two most reliable ways are: to make extra payments towards the Principal, or/and refinance into a Fixed Rate Mortgage.

How do extra payments help? The amount paid as Interest is a percentage of the outstanding balance (the principal part). The lower the balance - the lower the absolute interest payment. If your mortgage carries no principal prepayment penalties, you can pay some extra cash towards the principal. It may keep the absolute sum of your monthly interest payment close to intact on the one hand, and it will accelerate the overall payoff of the mortgage on the other. So none of your money will be wasted, but you may have to tighten your belt for a while.

Refinancing into a Fixed Rate Mortgage is not cheap either, so before you decide to turn to the stability of a fixed rate, analyze your current mortgage – make sure the change is worth it. Points to consider:

• a convertible loan feature that allows for an easier conversion of an Adjustable Rate Mortgage into a Fixed Rate Mortgage may already be included into your current contract.
• Compare the cost of refinancing with the gain on the saved interest.
• Your current adjustable rate mortgage very likely carries all kinds of caps. You have to see how they limit the rate and how much higher it can possibly get. It may well so happen that your highest rate will still be lower than the fixed rate.
• Watch out for the Payment Cap as the rates rise! Make sure it is not amortizing your mortgage negatively! If it is – refinance immediately into anything you can afford, before it brings your current balance to the size far beyond your financial potential!