The Surprising Reasons Your Fixed-Rate Mortgage Payment Could Rise
You're paying off a 30-year or 15-year fixed-rate mortgage loan. Because the interest rate attached to your loan will never rise or fall, this means that your monthly mortgage payment will never change either, right?
Not quite. Even if you're paying down a fixed-rate mortgage loan, your monthly payment can still rise, or, if you're lucky, fall from year to year. That's because your property taxes and homeowner's insurance can change during the life of your loan. And when your taxes or homeowner's insurance rises, your monthly mortgage payment can, too. This can catch even financially savvy homeowners by surprise, says Kyle Winkfield, president and chief executive officer of the Winkfield Group, a financial planning firm in Rockville, Maryland.
"So many people make financial decisions without fully understanding all the moving parts," Winkfield said. "Sometimes people make their mortgage decisions in a vacuum. When they think about a mortgage they think about the interest rate. They never think about all those other moving parts."
Property Taxes
When you take out a mortgage loan, your lender might require you to sign up for an escrow arrangement. Under an escrow plan, you send extra dollars to your lender each month to cover the estimated property taxes you'll need to pay each year on your home. When your taxes are due, your lender makes the payments on your behalf, using the money built up in your escrow account.
Property taxes can account for a big part of your monthly mortgage payment, especially in expensive parts of the country. In some areas, you might have to pay $6,000, $7,000, or more every year in property taxes. That could mean $500 a month extra added to your mortgage payment if you are working under an escrow arrangement with your lender.
If your property taxes increase, you'll have to pay more each month to cover this jump. Say your lender estimates that your yearly taxes will rise from $6,000 a year to $7,200. Instead of paying $500 each month to cover this amount, you'll need to provide $600 every month. Your mortgage bill, then, will rise $100 a month.
Your lender does have to provide written notice of any increase it needs in escrow funds, so you won't open your mortgage bill one day to see that your monthly payment has suddenly increased.
Homeowner's Insurance
The other variable of your mortgage payment is your homeowner's insurance. The cost of homeowner's insurance varies across the country, but you can expect to pay about $1,000 a year. Lenders often request that homeowners pay this, too, out of an escrow account. Just as with property taxes, you'll pay a bit extra each month to cover the estimated annual cost of your homeowner's insurance. Your lender will make your payment on your behalf with these dollars once your payment comes due.
This isn't a cost that you can avoid if you're financing your home. Mortgage lenders will require that you show proof of a homeowner's insurance policy before they'll approve you for a loan.
Like your property taxes, your homeowner's insurance can change during the life of your loan. If you make significant improvements to your home, increase its size, or renovate it, your insurance costs might increase. And when they rise, your monthly mortgage payment might jump, too.
Because even fixed-rate mortgages can be unpredictable, Winkfield recommends that consumers not take out mortgage loans with monthly payments that are at the very top of what they can afford. Instead, consumers should leave some breathing room in case their monthly mortgage payment does rise.
"Create a budget so that when it rains and you want a raincoat and an umbrella, you have the money for that," Winkfield said. "If your payment does go up, there are solutions. You can budget your money differently. You can spend less. There is nothing like a bit of fear to make people realize that they don't have to eat out four times a week."
Have you ever been hit with these unexpected mortgage payment hikes?
Tagged: Real Estate and Housing, fixed-rate mortgages, homeowner's insurance, payments, property taxes
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Don't forget HOA fees
Here's a tip: Both times I've bought a house my husband and I refused to take on the accompanying mortgage with a bank unless they did not escrow taxes and insurance. I think it is incredibly obnoxious as well as yet another way for banks to use customers' funds to have things escrowed. In my over two decades of adult life owning a house, I have always paid my taxes and homeowners on time out of my own funds. If a bank is not prepared to let you do this, just tell them you will go elsewhere. That is what I threatened both times and it worked. Although our house is paid off, if we do take on another mortgage in the future, we would still do the same thing, especially since we have a very high credit rating.
I never realized that borrowers could refuse the escrow account! I complete a financial budget every six months and I know I would be able to my taxes and homeowners insurance on time myself. I also have a very high credit rating--finally, after some ridiculous mistakes in my younger years. :-)
However, I think that a person who is not so careful with money would benefit from having an escrow account.
Dont pat attention to this "advice", they want you to get discouraged about buying a house or refinance a house now that the rates are low, which is the best time to do it.
OR, you can pay the taxes and homeowner's insurance yourself and save money. They get to use your money for free for that year! But if you do it yourself, Make sure that you have control, can save up just what you need, and have a cushion in your own savings account, not the bank's. Most importantly, save up what you'll need for both items during the year. A big surprise bill that's not a surprise since it comes around every 365 days is not fun. Same with the plates on your car and your driver's license.
Wait! People actually include property taxes and insurance in a mortgage payment? That sounds a little crazy to me. Why not include gas, electric and landscaping too?