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Oct 2017

Can My Monthly Mortgage Payment Ever Change?

Once you close on your loan, you’ll start making monthly mortgage payments to your mortgage lender. For the most part, your mortgage payment will be the same throughout the life of your loan (assuming you have a fixed-rate). However, depending on your loan type and a few other variables, you should be prepared for the possibility of some fluctuation in your bill.

What's in my monthly mortgage payment?

Your monthly mortgage payment includes more than just the price of your home. [Principal, interest, taxes, and insurance PITI are the components of your monthly payment, and it’s important to understand each element so you know what you’re paying for. Principal is the amount you borrow and have to pay back, which may include the sales price of your home, minus your down payment. If you put $15,000 down on a $150,000 loan, your principal balance is $135,000. Interest is a percentage of your principal balance. You pay interest back to your lender, who charges you for borrowing money from them. Taxes, specifically, property taxes, are charged for real estate property (like the house, building, or land itself), and are determined by your local government. Insurance includes your homeowners insurance, private mortgage insurance (PMI) if it’s required, and any supplemental insurance, like flood insurance, if it applies to your property. Insurance protects both you and your lender from potential losses.

What could cause my payment to change?

You got your mortgage payment bill this month, and it was slightly higher than it normally is. But what happened? There are a few possibilities as to why your bill could be different this month.

Your property taxes changed

Your property taxes may fluctuate up or down. Most lenders will have you pay your property taxes monthly — as part of your mortgage payment — into an escrow account. Paying taxes through an escrow account allows you to pay a small amount of your taxes each month, so that you don’t have to come up with the entire tax bill at once when taxes are due. If your escrow account doesn’t cover all your taxes because of tax rate increases, your lender will cover the shortage. When your yearly escrow analysis comes around, your tax payment will then go up to pay for your shortage from the previous tax season. Since we learned earlier that taxes are the “T” in PITI, this will cause your monthly mortgage payment to increase. It is also possible that your property tax rate could go down and the amount you would owe your lender every month in taxes would decrease. Additionally, your property value is occasionally assessed. Depending on if your property has increased or decreased in value, your property taxes may change as well. Property value assessment requirements vary based on the area you live in, so check with your local government for the specifics in your area.

Your insurance changed

Owning a home requires that you have mortgage insurance — insurance is the second “I” in PITI. We already learned that there are three different types of insurance you may be required to pay: homeowners insurance, private mortgage insurance (PMI), and flood insurance. While not everyone is required to have PMI and flood insurance, every home buyer is required to get homeowners insurance. Most lenders have you pay insurance through an escrow account, similarly to how you pay your taxes. If, or when, you have to change your homeowners insurance, whether it expires and you have to renew it, or you change providers, your premiums might change. You may have a shortage in your insurance escrow account if this happens. So, your mortgage payments may go up to cover the difference. Or, your premium might go down, which could lower the amount you owe each month in insurance, potentially decreasing your monthly mortgage payment.

You have an adjustable-rate mortgage

When you choose a loan option, you can choose a fixed-rate mortgage or adjustable-rate mortgage (ARM). If you have an ARM, this may be the reason that your mortgage payment changed.

What is an ARM?

An ARM comes with an interest rate that may fluctuate throughout the life of the loan. One of the selling points of an ARM is that the interest rate is usually lower during the initial interest rate period than they are with a fixed-rate mortgage. After the initial interest rate period however, the rate may change based on predetermined intervals.

How do ARMs work?

Let’s look at a 5/1 ARM, one of the most popular adjustable rate mortgage options. The “5” means that the initial interest rate will not change for the first 5 years of the loan. The “1”means that after the initial interest rate period ends, the interest rate could be adjusted every year. Other popular ARM options include a 3/1 ARM, 7/1 ARM, and 10/1 ARM, which work the same way but with different initial interest rate periods. Once your initial interest rate period ends on your ARM, your mortgage payment may fluctuate up or down, depending on the interest rate. With a 5/1 ARM, for example, after your 5-year initial interest rate period, your rate will change every year. Don’t be alarmed if your monthly mortgage bill fluctuates some during the life of your loan — there could be a simple explanation. However, it’s a good idea to monitor your statements every month, and clarify any changes or differences if they’re unclear. If you have any questions, about your mortgage statement or your loan in general, contact your mortgage lender.