Mortgage Q&A: “Do mortgage payments increase?”
While this sounds like a no-brainer question, it’s 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.
Mortgage Payments 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 number, such as 5% up or down).
When your mortgage rate goes up, your mortgage payments increase. Pretty standard stuff here.
To avoid this pitfall, simply go with a fixed-rate mortgage instead of an ARM.
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 10 years.
Put simply, you’ll be paying the entire 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.
When Taxes or Insurance Increase
Then there’s the issue of property taxes and homeowners insurance.
Even if you’ve got a fixed-rate mortgage, your mortgage payment can increase if the cost of property taxes and insurance rise.
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.
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.
Read more: When do mortgage payments start?