Real Estate Investment 101: Getting Started

Is It True Monthly Payments Can Vary On A Fixed Mortgage?

When buying a new house, many people prefer to get fixed mortgages because they like the predictability of the monthly payments. However, depending on your lender and where you live, the amount of your mortgage payments can fluctuate from year to year. Here's why this may occur and your options for handling this situation.

Taxes and Insurance Affect Mortgage Payments

To minimize their risk of losing money on a home, it's common for banks to build the cost of homeowner's insurance and property taxes into the mortgage payments and then place the extra money collected into an escrow account that is used to pay these expenses on a yearly basis. This ensures there is always insurance on the home to pay for any losses that could impact the loan and prevents homeowners from falling behind on their taxes and having their properties seized by the government.

The problem is that the cost of property taxes and homeowner's insurance premiums can change. Although the bank will cover any shortfalls that occur at the end of the year, it will make adjustments to the mortgage for the following year to recover the money it spent and to ensure there's enough cash in the escrow account to pay for the increased costs. Since this isn't always clearly explained when homeowners take out mortgages, it's not surprising many are shocked when they receive notices from banks about impending increases in their monthly payments.

Avoiding Sudden Increases

While there are many benefits to having the bank pay the property taxes and homeowner's insurance on your behalf, it can be problematic toof, especially if you live on a fixed income. Additionally, just because the bank is paying for your homeowner's insurance doesn't mean it's getting the best deal.

Luckily, you can avoid this problem by avoiding this type of escrow. If you're currently shopping for a home and mortgage, you can opt out of this setup in the beginning and take on the responsibility of paying your taxes and insurance yourself. Be aware, though, most banks will only allow this if you meet certain requirements (e.g. put down 20 percent), so be sure to discuss the issue with your lender to see if you qualify. It's also not uncommon for banks to charge a higher interest rate to cover the added risk their taking by letting homeowners decline escrow.

If you already own your home, you can ask the lender to cancel escrow. Whether the bank will or not depends on the terms of your contract. If the contract doesn't allow for the cancellation of escrow, you may need to refinance your home to get out of it.

For more information about this issue or help finding a home if you're in the market, contact a real estate agent.