Many buyers these days tend to select a FIXED RATE mortgage, one where the interest rate and principal are fixed and do not change for the life of the loan.
There may be times when an ADJUSTABLE RATE mortgage makes sense…such as if you are only planning to be in the home for a few years (less than the term of the adjustable rate) but these should be carefully considered due to the financial consequences when the loan rate adjusts if you still have the property. The lure for some is that the interest rate on say a 3 or 5 year- adjustable is less than a fixed interest rate.
But for many the lure of having a fixed rate mortgage is strong, and lenders often recommend them to many buyers because there is less risk.
The question, however, that first time buyers often have is “how can my house payment go up” when I got a fixed rate mortgage? This is likely to arise after the first year when you might see the first adjustment at year end. So what gives? You thought your payment wouldn’t change, right?
You’re right in part – the principal and interest rate don’t change. But read on.
Many buyers have funds for the year for their property taxes and home owner’s insurance collected each month as part of their mortgage (you’ve heard of PITI, right?That’s principal, interest, taxes and insurance), i.e., 1/12 of the funds needed per month. These funds are held in an escrow account by the lender. This arrangement may be required by the lender.
At the appropriate time the lender makes the payment on the property taxes – here in San Diego County twice per year, in November and in February – with the funds held in escrow, a.k.a. the impound account. NOTE – I always recommend that you check to make sure your lender has made your property tax payments when they are due. You should get a bill from the tax assessor’s office so you know when the taxes are due and it should note the statement is a COPY and there is an IMPOUND ACCOUNT.
The same is true for the homeowner’s insurance that is part of your payment (your lender may require your insurance payment be collected during the year). This payment will be due one year after you closed on your home – remember you paid 1 full year of insurance up front at closing? Check with your lender to make sure your insurance is paid in a timely manner!
The reason your monthly payment can, and likely will, change is because (1) property taxes often go up some each year, and (2) the homeowner’s insurance can also be adjusted. Normally you will get a statement from your insurance company about any change in the annual cost, and your property tax notice will show any new tax amounts.
Your lender will issue an escrow statement showing what’s been collected and paid as well as what is needed to be collected each month in order to make up for any tax and/or insurance increase. It’s not uncommon for there to be a shortage, in which case your payment will be adjusted.
Obviously if there are questions it’s wise to check with your lender.