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LESSON
26: MONTHLY PAYMENT CHANGES -- WHAT CAUSES THEM AND HOW TO COPE
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2) Try prepaying to lessen the
impact of a rate increase.
Prepayments on fixed-rate mortgages reduce their balances, loan
terms and overall interest bills, but not the monthly payments.
Prepayments on ARMs, on the other hand, reduce everything because
monthly payments are recalculated each year along with rates.See
Tips
Fixed-rate mortgage holders will see their payments
remain relatively stable, but they can change. A borrower's monthly
payments could rise something like $20 in the months following an
escrow
analysis if the tax payments the lender makes on that person's
behalf will be higher in the following year, for example. Payments
could jump even more if there wasn't enough in the escrow
account to cover a recent tax or insurance payment and the lender
has to make up the deficit by jacking up the escrow
payments.
On the other hand, payments will fall for borrowers once they get
rid of PMI
on their loans. We'll provide more details later in the next chapter,
but customers can save anywhere from a few bucks on up to $100 a
month or more by eliminating their insurance premiums.
As long as an ARM customer
prepays at least 45 days prior to the effective adjustment
date, the lender will use the reduced balance figure to
establish next year's payment. That reduces the impact of
the concurrent rate increase.
Borrowers should prepare for
monthly payment changes by socking away money. Most escrow
analyses take place at the end of the year, so work on building
up your savings in November or December in case your payment
jumps in February.
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