Your mortgage payment is typically consistent for a period of time. Due to a number of factors, though, that consistency can’t last forever. In fact, for most homeowners, their mortgage payment changes several times over the course of the loan term.
You might get lucky, and that could translate to a lower payment and less out of pocket for some periods of your loan. You also might fall on the other side of the coin, experiencing a slight increase in your payment for some amount of time.
Either way, you will get a notice of the anticipated change before it occurs — either from the mortgage lender you originally applied with or from the servicer who’s currently handling your loan. Whichever direction your payment goes, it’s important to stay calm: changes to mortgage payments are quite common. Look into the details of yours, call your lender or servicer, and find out the reason why the change is occurring. More than likely, it’s the result of:
- Having an adjustable interest rate loan – If you have what’s called an adjustable-rate mortgage, meaning your interest rate is variable and can change over the term of your loan, then your payment will most definitely fluctuate as the years go on. The timing of adjustable-rate mortgage changes — as well as how much they will fluctuate — will vary, though. On some loans, you might have a fixed payment for several years before your rate goes up or down, while on others, the change happens after the first year. These changes typically occur around the anniversary of your loan closing. If you have an adjustable-rate mortgage (called an ARM), make sure you understand your fixed-rate periods as well as your rate caps, so you can adequately prepare for any increases in payment.
- Having an interest-only or pay-option loan – With these loans, you pay only interest on your mortgage balance for a period of time. When that time expires, you will start paying down the principal — which means a higher payment for the remainder of the loan. Again, make sure you fully understand the type of mortgage loan you have and know the expiration date for any interest-only periods. You want to have a plan in place once principal payments are required.
- A change in your estimated property taxes, HOA fees, or homeowner’s insurance premiums – If you have an escrow account, which covers things like property taxes, HOA dues, and home insurance premiums, a change in any of these factors will impact your mortgage payments. These changes will usually occur at the end of the year, once your lender or servicer has performed an escrow analysis (which is used to determine if the amount they’re holding in escrow can cover the next year’s expected taxes, insurance and other fees.) You should get your escrow analysis in the mail, as well as a letter detailing any resulting change in your payment.
- Canceling PMI – On conventional loans (not FHA), once you’ve reached 20 percent equity in the home, you can cancel your Private Mortgage Insurance policy, which is used to protect your lender in case you default on the loan. Canceling PMI can significantly lower your monthly mortgage payment for the rest of your loan term.
If you have questions about why your mortgage payment is changing, simply call up your lender/servicer and ask for an explanation. There is always a slight chance a mistake was made. Whatever the reason is, you have a right to understand why your payment is changing.
If a Change is Coming, Here’s What to Do
Once you’re aware that a payment change is on the horizon, you’ll want to act quickly and create a plan. Remember that an increased monthly payment won’t just change your household cash flow (as well as how much you can spend other places), but it might mean updating any automatic payments you might have scheduled. You don’t want to underpay your first new installment (and face additional penalties fees as a result), so change your autopay settings ASAP.
If the change is happening because you have an adjustable-rate or interest-only loan, you might also want to look into refinancing. Depending on what the current mortgage rates are, you might be able to lower your monthly payment and save significant amounts of cash in the long run through a well-planned refinance. Be sure to talk to a loan officer about the options you might have for refinancing your current mortgage — there are several types of refinances available.
Not sure if you could experience a change to your mortgage payment in the near future? Want to be prepared just in case? Contact your loan officer at Embrace Home Loans today to discuss your mortgage loan.