Your mortgage loan payment can go up and fluctuate. Whether your mortgage payment changes depend primarily on three factors. The factors are the type of mortgage loan you have, changes in your property taxes and changes in your homeowner’s insurance premium. There are also some miscellaneous issues that will change your mortgage payment. We look at how this works. For more help with working a mortgage into your financial plan, consider finding a financial advisor.
Adjustable-Rate Mortgage Loan
One reason your mortgage payments could change is very simple — you have an adjustable-rate mortgage loan or ARM. When you buy a home, you should think about it carefully before you get an ARM since your mortgage payment can fluctuate. If the economy is in a period of rising interest rates, it may not be a good time to agree to an ARM.
An ARM is a mortgage with a variable interest rate. Your interest rate on your principal balance can and will fluctuate. Unless you are very sure that you will stay employed and have the same or a rising salary, an ARM is not usually the best idea. Instead, try to qualify for a mortgage loan with a fixed interest rate over the life of the loan.
The interest rate on ARMs may be tied to the prime interest rate or the federal funds rate. There are other benchmark interest rates to which a financial institution can tie their interest rate on ARMs. As the benchmark rate goes up, so does the interest rate on your mortgage, within limits. The benchmark is the ARM index. Customers with a variable-rate mortgage are charged a spread over the ARM index. The spread over the ARM index is called the ARM margin. It is determined by the lender.
The terms of the ARM spell out how much your interest rate can change and when. For example, a 5/1 ARM has a fixed interest rate for five years and then adjusts every year based on the benchmark and the lender’s margin. If the benchmark is 2% and it is year six of your loan, the interest rate on your loan will adjust by two 2% plus the ARM margin. ARMs generally have interest-rate caps so the interest rate cannot go too high, but it is still disconcerting for many homeowners to be uncertain what their mortgage loan payment will be at the end of every year. A fixed-rate mortgage may be a better option for most homeowners.
If you plan to own your home for a brief time and interest rates are dropping, an ARM may not be a bad choice.
Unless you request otherwise, you will have an escrow account with your mortgage company that you will fund with a portion of your mortgage payments every month. This is the case for both adjustable-rate and fixed-rate mortgages. One disbursement that the escrow account will make is for your homeowner’s insurance premium. Instead of having to produce what may be a large lump sum to pay your premium each year, you pay part of your homeowner’s insurance premium each month to your escrow account held by your lending institution. When your homeowner’s insurance is due each year, your lending institution then disburses the money to pay it.
If your homeowner’s insurance premium goes up, then your monthly mortgage payment will also go up so you will have the money at the end of the year to pay your mortgage insurance.
The other item that you pay each year from your escrow account is your property taxes. Part of your monthly mortgage payment is also for property taxes which are paid by your lending institution out of your escrow account each year. If your property is reassessed or if the property tax percentage is changed by legislation, your mortgage payment will go up if the reassessment or the percentage change is higher.
Skipped or Late Payments
If you don’t make a mortgage payment or if it is made late, then your mortgage payment for the next month may go up temporarily due to the skipped or late payment.
This, of course, is a very easy situation to avoid. Make sure to pay our mortgage every month — and consider setting up automatic payments so you don’t have to remember to send a payment.
These are the reasons that your mortgage loan payment may go up. As a consumer, you must be aware of the pitfalls of the adjustable-rate mortgage. The low mortgage payment at first can be very attractive, but that payment will adjust, perhaps upward, according to the terms of your mortgage. If your mortgage payment goes up and you can’t trace the cause to any of these factors, check with your lender because sometimes mistakes are made.
Tips on Home Buying
- When you are in the market to buy a house, you need to know how much house you can afford. Use SmartAsset’s home affordability calculator to make that determination.
- A financial advisor can help you figure out how a mortgage fits into your plans. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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