If you are about to become a first-time homeowner, you may be wondering if your monthly mortgage payment will stay the same or if it will ever go up. The answer depends on what type of home loan you choose: fixed-rate, adjustable-rate, or interest-only. With a traditional fixed-rate mortgage, you would expect your payment to remain constant but there can even be some exceptions there. Here are three scenarios when your mortgage bills might increase:
- ARM Loans
An adjustable-rate loan (ARM) is a great option to help first-time buyers break into an expensive housing market. They allow borrowers to have a lower-than-average interest rate for an initial period, anywhere from one to seven years typically. That means your mortgage payments will be lower and fixed at a constant amount during that time frame. After your initial period is up, however, the rate is allowed to increase according to a certain market index. If general interest rates are low, your payment may not increase much, but if market rates are substantially higher than your first rate, your monthly bill could spike. There are built-in limits to how much your payment can rise each year to limit the sticker shock. Still, you should run some numbers to make sure you can afford the payments at their highest possible rate. If you are approaching the end of the introductory rate period, you could try refinancing into a fixed-rate mortgage instead.
- Interest-Only Loans
These mortgages allow you to pay only the interest due on your loan for a certain time. This is sometimes helpful for getting your foot in the housing market door, especially when it’s particularly competitive. These loans can be very risky though as once the initial period ends, you will then be required to pay both principal and interest each month, which could result in a dramatically higher payment. Again, refinancing before the interest-only portion ends may be a good option, although it will still likely result in a higher payment than what you have been making.
- Taxes and Insurance
And even if you have a fixed-rate mortgage, there are times when your mortgage payment might increase. Your property taxes and homeowner insurance are often rolled into your monthly sum. If your state or local taxes rise, you will see it reflected in your home loan bill. Additionally, homeowner insurance premiums can rise periodically, especially if inflation is climbing or if your area has recently experienced a natural disaster. You can expect these premium jumps to increase your mortgage payment as well. If there are any changes to your taxes or insurance fees, you will receive a notice from your escrow account. They will often give you the option to pay the increase in one lump sum or to split it up equally among your monthly payments.
Once you know how and why your mortgage bill could increase, you can prepare for that possibility, ensuring you can still afford your home loan in the future.
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