When you have a mortgage, the monthly payments will probably change sometime during the term of the loan. There are two main reasons for the payment amounts to change:
- The rate on an adjustable-rate mortgage changes.
- There are changes in taxes, tax assessments, insurance premiums or association fees.
The interest rate on an adjustable-rate mortgage doesn’t necessarily change every year. When it does change, the rate changes near the anniversary of the date that the loan was closed.
Both types of mortgages — adjustable-rate and fixed-rate — are affected by changes in taxes, insurance premiums and other fees. Those changes tend to kick in toward year’s end, when the mortgage servicer performs an escrow analysis.
Tips for ARM borrowers
Adjustable-rate mortgage borrowers experience the greatest volatility because they pay interest at rates that fluctuate with market changes. When the index rate rises, it can send your monthly payment skyrocketing.
If interest rates start to climb, prepare yourself 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 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.