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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.
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Chapter 7: Ownership: After closing
