Last week I was sorting through old tax documents and came across one of the first mortgage statements I ever received. Surprisingly, it was nearly $150 less per month than my current monthly mortgage payments. How could that be? I’ve lived in this house for over six year and have a fixed-rate mortgage. How could it be so much more expensive now than it was six years ago?
Whether you own a home already or are planning to purchase one in the future, there are a few things you should know about your monthly mortgage payment and its potential to fluctuate.
Fixed-Rate v. Adjustable-Rate Mortgages
First we’ll start with the obvious. The type of mortgage you choose will have a large impact on whether the monthly cost changes. Adjustable-Rate Mortgages (ARMs) were largely faulted for the big housing bubble collapse of 2008 - 2010 since they allowed homebuyers to secure mortgage with interest rates that could potentially (and did) change. The rates would often rise to levels so high that homeowners were no longer able to afford their monthly mortgage payment.
Alternatively, Fixed-Rate Mortgages are preferred by most home buyers today since the interest rate is locked in for the life of the mortgage. That prevents any unpleasant changes in your monthly mortgage payment from popping up. But if that’s the case, how is it still possible for your monthly payment amount to fluctuate?
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is a form of insurance that you may be required to carry if the downpayment on your house was less than 20% of your home’s purchase price. It’s an added monthly cost that would likely be lumped in with your mortgage payment if you are in a situation where you are required to carry such insurance.
There is, however, some good news when it comes to PMI. First, it should decrease over time. The more principal you pay down on your loan, the lower your monthly PMI payments get. Secondly, PMI will eventually go away. Once you have paid down enough of your principal amount that the ratio is 78% (i.e. you now owe $156,000 on a house valued at $200,000) your bank should automatically drop the cost of the PMI from your monthly bill. Sometimes, you may need to do some follow up to request that the PMI requirement is dropped. Your lender will most likely need a reminder if you have made principal payments in addition to the minimum amount the bank requires or if you were able to prove that the loan’s value is 78% or less of the value of the property via a new appraisal. If pursuing the latter option, check with your bank before seeking a new appraisal. Not all mortgage lenders will honor a new appraisal as a way to drop your PMI payments.
Depending on your state and mortgage broker, you may be required to pay your homeowner’s insurance and property taxes into an escrow account so that the bank can be guaranteed that you will continue to pay those expenses. If this is the case with your mortgage, be sure to watch your escrow account and how much is being paid for home insurance. Often this is a blind spot where your premiums may be raised for any number of reasons without you even noticing. If you’re unhappy with the cost of your homeowner’s insurance, call your insurance provider and ask if there are any promotions available to lower your rate. Also feel free to reach out to other insurance companies that may be willing to provide you with reduced rates to get you onboard as a client. They will also be more than happy to help you iron out any issues with your escrow account that may come up in the process of switching providers.
Property taxes (otherwise known as Real Estate Taxes) can be one of the biggest wild cards you’ll run into when you take on a mortgage payment. It’s certainly what drove the increase in my mortgage payments. When you are buying a home and estimating how much the monthly payments will be, the figure that will often be factored in to estimate your payments is the last reported property tax payment made by the previous owners of the home. While this usually is a decent predictor for the first year or two, here’s a little secret about property taxes: they almost never decrease. If your property taxes hold steady you’re among one of the luckier homeowners in this country.
It is highly probable that your property taxes will increase in the next 15-30 years, so you need to be sure that you can afford such an increase. In the six years I have owned my home, my property taxes have doubled. Doubled! While that is not a typical increase during that time period, it’s something that must be considered.
If you are sitting down to calculate how much house you can afford per month, make sure you leave yourself some breathing room. If you already own a home, make sure you’re monitoring your monthly mortgage payment for changes and asking questions if something seems odd to you. Your bank account will thank you.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband, and enjoys taking their adorable mutt for walks or reading a good book while buried under a pile of cats.