Mortgage Q&A: “Do mortgage payments increase?”
While this sounds like a no-brainer question, it’s actually a little more complicated than it appears.
You see, there a number of different reasons why a mortgage payment can increase, aside from the obvious interest rate change. But let’s start with the obvious and go from there.
And yes, even if you have a fixed-rate mortgage your payment can increase. While that might be bad news, it’s good to know what’s coming so you can prepare.
Mortgage Payments Can Increase with Interest Rate Adjustments
It can move up or down once it initially becomes adjustable (after the teaser rate period ends), periodically (every year or two times a year) and throughout the life of the loan (by a certain maximum number, such as 5% up or down).
When your mortgage rate goes up, your mortgage payments increase. Pretty standard stuff here.
To avoid this potential pitfall, simply go with a fixed-rate mortgage instead of an ARM and you won’t ever have to worry about it.
Or refinance before your first interest rate adjustment to another ARM. Or go with a fixed-rate mortgage instead. Or sell your home. Plenty of options really.
Mortgage Payments Increase When the Interest-Only Period Ends
Another common reason for mortgage payments increasing is when the interest-only period ends.
Typically, an interest-only home loan becomes fully amortized after 10 years. In other words, after 10 years you can’t just make the interest-only payment anymore. You have to make principal and interest payments.
And guess what – the fully amortized payment will be significantly higher than the interest-only payment, especially if you deferred principal payments for a full 10 years.
Put simply, you’ll be paying the entire beginning loan balance in 20 years instead of 30, assuming the term was for 30 years, because interest-only payments mean the original balance remains untouched.
This can result in a big monthly payment increase, forcing many borrowers to refinance their mortgages. Just hope rates are favorable when this time comes.
Mortgage Payments Increase When Taxes or Insurance Go Up
Then there’s the issue of property taxes and homeowners insurance, assuming you have an impound account.
Even if you’ve got a fixed-rate mortgage, your mortgage payment can increase if the cost of property taxes and insurance rise, and they’re included in your monthly housing payment.
A mortgage payment is often expressed using the acronym PITI, which stands for principal, interest, taxes, and insurance.
With a fixed mortgage, the principal and interest amounts won’t change throughout the life of the loan.
However, there are cases when both the insurance and taxes can increase, though this only affects your mortgage payments if they are escrowed.
And the fluctuations will probably be minor relative to an interest rate reset or an interest-only period ending.
If you have a mortgage statement handy, it might may something like “escrow account has a shortage,” and as such, your new payment will be X to cover that deficit.
Again, this is usually quite nominal because the difference is spread out over 12 months and typically not large to begin with.
The takeaway here is to consider all housing costs before determining if you should buy a home, and make sure you know how much you can afford well before beginning your property search. You’d be surprised at how the costs can pile up.
At the same time, mortgage payments have the ability to go down for a number of reasons as well.
Read more: When do mortgage payments start?