Why does your mortgage payment change from year to year?
You may have bought your home with a 30-year fixed-rate mortgage thinking “This is great! No more rent increases. My monthly payment is fixed for life.”
Maybe, after about a year into home ownership, you got a notice that your monthly payment was going up. “What’s going on?!!!” You wonder.
The fact is that your payment is likely to change over the course of time, sometimes increasing and sometimes decreasing.
Included in a Mortgage Payment?
Your mortgage payment typically includes more than just repayment of the principal and interest on the money you borrowed to purchase your home. It usually includes one-twelfth of your annual property tax amount as well as one-twelfth of your annual homeowner’s insurance cost. If you made a down-payment of less than 20 percent of the purchase price when you bought your home, the mortgage payment is also likely to include a mortgage insurance payment.
Escrow Accounts
You pay payments of one-twelfth of your property tax and insurance payments into an account, called an escrow account. These are held for you until your annual tax bill or insurance bill is due. Then, your lender makes the payment for you. Over time your tax bill and insurance bill can change. Lenders typically review your escrow account balance and tax and insurance bills once per year and adjust your monthly payment. Increases in your tax or insurance costs, of course, cause increases in your monthly payment, and vice versa. You cannot do much about tax increases, but it makes sense to review your homeowners’ insurance annually with your agent.
Mortgage Insurance
Some mortgages allow for elimination of mortgage insurance as you pay down your loan balance. Elimination of mortgage insurance will reduce your monthly payment. The law requires lenders to remove mortgage insurance on conventional mortgages once your loan balance falls to 78 percent of the original purchase price. However, you can request that your lender remove mortgage insurance at 80 percent or less of the original purchase price.
Note: if you’ve been in your home for a while and its’ value has grown to the point where your loan balance is less than 80 percent of the current value, you may be able to refinance into a loan that does not include mortgage insurance. Talk with your favorite mortgage lender if you think you are in that situation.
In Summary – Changes in Mortgage Payment
Some people are surprised when their monthly payment changes on a fixed-rate mortgage. Yearly changes in property taxes or homeowners’ insurance costs can lead to such changes. Elimination of mortgage insurance can have the positive effect of reducing your monthly mortgage payment.
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