Homeowners who want to make the same mortgage payment every month typically apply for fixed-rate products. Fixed-rate mortgages are so popular that over 90 percent of American homeowners opted into these programs. Although this class of home loan promises a consistent and reliable monthly mortgage payment, property owners can be surprised when they fluctuate. At CCCU, we work diligently with community members to provide home loans at the best rates possible. We hope the following information clarifies why your monthly mortgage payment could change over the life of the loan.
Escrow is a term used to describe the portion of your monthly installment applied toward property taxes and insurance. Although not every borrower bundles these expenditures into the monthly mortgage payment, doing so often delivers the following benefits.
Peace of Mind Knowing Taxes and Insurance are Paid Up
Avoids Large, Lump Sums Payments
Offers Convenient Monthly Budgeting
Local lenders generally advocate using escrow because it minimizes the risk of borrowers having insurance policies canceled or municipalities placing liens on a property. It’s also essential to understand that escrow, unlike your fixed-rate mortgage, typically changes over time.
When taxes and insurance increase, and you continue to pay the same monthly installment, your escrow holdings deplete. What usually happens next is the mortgage service provider will send you a breakdown of the expenses and highlight the shortfall. Obviously, the mortgage payment must be adjusted to account for the rising expenses that have nothing to do with the principal and interest of your fixed-rate home loan. It’s also not unusual for lenders to add a slight percentage to cover future increases and ensure the escrow pool doesn’t run dry.
Insurance carriers are tasked with calculating the risk of paying out claims when arriving at the cost of an annual policy. The hard numbers that underscore their assessment continue to evolve, usually driving the price of homeowners insurance higher. These are key factors that cause policies to increase.
Inflation: When the cost of energy, goods, and materials ticks up, insurance companies are equally affected. Like other businesses, they pass along inflationary changes to customers.
Natural Disasters: Severe weather events are the number one reason property owners file claims. Payouts due to high winds, hail, and flooding prompt insurance providers to adjust rates across the board.
Building Costs: If you’ve noticed the cost of lumber and other building materials rising, it’s entirely likely it will have at least a minor effect on your premium. That’s largely because construction materials and labor are key factors in repairing and replacing a structure.
You may be able to rein in homeowners’ insurance costs by conducting some due diligence. Review the policy to see if you are paying too much for repair and replacement costs or have unnecessary coverage areas. Shop around for competitive rates before your current policy expires to make an informed decision.
Local municipalities assess property taxes on a schedule, bringing changes in how much homeowners pay on an annual basis. Some counties conduct reassessments every year, while others wait much longer. When the fair market value of your home gets recalculated by taxing authorities, the cost usually rises. Your escrow fund must also account for increased property taxes by setting aside enough money to pay them in a timely fashion. The result is your monthly installment ticking up.
While the overwhelming majority of home buyers choose fixed-rate mortgages, there are sound reasons to apply for an Adjustable-Rate Mortgage (ARM) as well. The payments may be lower during the initial grace period. It’s also not uncommon for ARMs to provide a static monthly premium for an extended period of time before adjustments are made. Borrowers sometimes take advantage of this opportunity and then refinance to a fixed-rate product after establishing a repayment history and improving their credit score.
While ARMs can remain steady for a period, they will change based on the same reasons the escrow embedded in fixed-rate mortgages usually increases. That being said, if you believe interest rates will decline in the coming years, the monthly installment of an ARM might actually go down. If you are weighing the pros and cons of an ARM versus a fixed-rate mortgage, we recommend speaking with a home loan professional.
It may come as something of a surprise, but you may receive a refund if you pay too much into your escrow fund. Although rare, some mortgage servicers overestimate the amounts needed to cover insurance and taxes. At the end of the year, they review the account and make a decision about how much the fund should keep in reserve. Anything beyond that amount is usually refunded to the homeowner.
At CCCU, we offer fixed-rate and adjustable mortgages to our valued community members. If you are in the market for a home or would benefit from refinancing an existing mortgage, contact us today, and let’s get the process started!
