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  Mortgage Basics   Chapter 7: Ownership: After closing
Emotions, family and personal reasons all come into play in any home-buying decision.

Payment changes


Most monthly mortgage payments will change during the term of the loan, either by design, as in the case of adjustable-rate mortgages, or ARMs, or through fluctuations in taxes, tax assessments, insurance premiums and other costs for both ARM and fixed-rate mortgages.

Most escrow analyses are done at the end of the year. That's when tax increases, higher insurance premiums and other fee hikes tend to bump up your monthly payment for the coming year. Generally speaking, it's a good idea to set aside reserves in November and December to cushion the blow of higher mortgage payments come February.

Tips for ARM borrowers
ARM customers experience the greatest volatility because they pay interest at rates that fluctuate with market changes. When the rate environment takes a turn for the worse, it can send your monthly ARM payment skyrocketing.

If interest rates start to climb, prepare yourself for a shot in the ARM by setting aside the extra $50 to $75 per month you saved by avoiding a fixed-rate mortgage. The more time you have before a likely rate adjustment, the more money you can stash to cushion the blow.

You also may want to try prepaying as a way to lessen the impact of an expected rate increase. One of the advantages of an ARM is that prepayments can reduce your monthly payments, which are recalculated each year along with rates. As long as an ARM customer prepays at least 45 days prior to an adjustment date, the lender will use the reduced balance figure to establish next year's payment, thus softening the impact of concurrent rate increases.

Tips for fixed-rate borrowers
Fixed-rate mortgage customers enjoy relatively stable monthly payments, but they have fewer options when changes do occur. For instance, prepaying on a fixed-rate mortgage can reduce your balance, loan terms and overall interest bill, but it has no effect on your monthly payment.

One way you can reduce your monthly payment is by ridding yourself of mortgage insurance. Once you have met your lender's requirements, you could save anywhere from a few bucks to more than $100 per month by dropping mortgage insurance.

-- Posted: May 1, 2006
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