Do Mortgage Payments Increase? Here Are 4 Ways They Can Get More Expensive

Mortgage
Q&A:
“Do
mortgage
payments
increase?”

While
this
sounds
like
a
no-brainer
question,
it’s
actually
a
little
more
complicated
than
it
appears.

You
see,

there
a
number
of
different
reasons
why
a
mortgage
payment
can
increase,
aside
from
the
obvious
interest
rate
change.
But
let’s
start
with
that
one
and
go
from
there.

And
yes,
even
if
you
have
a
fixed-rate
mortgage
your
monthly
payment
can
increase.

While
that
might
sound
like
bad
news,
it’s
good
to
know
what’s
coming
so
you
can
prepare
accordingly.

Mortgage
Payments
Can
Increase
with
Interest
Rate
Adjustments

• If
  you
  have
  an
  ARM
  your
  monthly
  payment
  can
  go
  up
  or
  down
• This
  is
  possible
  each
  time
  it
  adjusts,
  whether
  every
  six
  months
  or
  annually
• To
  avoid
  this
  payment
  surprise,
  simply
  choose
  a
  fixed-rate
  mortgage
  instead
• FRMs
  are
  actually
  pricing
  very
  close
  to
  ARMs
  anyway
  so
  it
  could
  be
  in
  your
  best
  interest
  just
  to
  stick
  with
  a
  15-
  or
  30-year
  fixed

Here’s
the
easy
one.
If
you
happen
to
have
an

adjustable-rate
mortgage,
your

mortgage
rate
has
the
ability
to
adjust

both
up
or
down,
as
determined
by
the
interest
rate
caps.

It
can
move
up
or
down
once
it
becomes
adjustable,
which
takes
place
after
the
initial
teaser
rate
period
comes
to
an
end.

This
rate
change
can
also
happen
periodically
(every
year
or
two
times
a
year),
and
throughout
the
life
of
the
loan
(by
a
certain
maximum
number,
such
as
5%
up
or
down).

For
example,
if
you
take
out
a

5/1
ARM,
it’s
very
first
adjustment
will
take
place
after
60
months.

At
that
time,
it
could
rise
fairly
significantly
depending
on
the
caps
in
place,
which
might
be
1-2%
higher
than
the
start
rate.

So
if
your
ARM
started
at
3%,
it
might
jump
to
5%
at
its
first
adjustment.

On
a
$300,000
loan
amount,
we’re
talking
about
a
monthly
payment
increase
of
nearly
$350.
Ouch!

Simply
put,
when
the
interest
rate
on
your
mortgage
goes
up,
your
monthly

mortgage
payments
increase.
Pretty
standard
stuff
here.

To
avoid
this
potential
pitfall,
simply
go
with
a

fixed-rate
mortgage
instead
of
an
ARM
and
you
won’t
ever
have
to
worry
about
it.

You
can
also

refinance
your
home
loan
before
your
first
interest
rate
adjustment
to
another
ARM.
Or
go
with
a
fixed-rate
mortgage
instead.

Or
simply
sell
your
home
before
the
adjustable
period
begins.
Plenty
of
options
really.

Mortgage
Payments
Increase
When
the
Interest-Only
Period
Ends

• Your
  payment
  can
  also
  surge
  higher
  if
  you
  have
  an
  interest-only
  loan
• At
  that
  time
  it
  becomes
  fully-amortizing,
  meaning
  both
  principal
  and
  interest
  payments
  must
  be
  made
• It’s
  doubly-expensive
  because
  you’ve
  been
  deferring
  interest
  for
  years
  prior
  to
  that
• This
  explains
  why
  these
  loans
  are
  a
  lot
  less
  popular
  today
  and
  considered
  non-QM
  loans

Another
common
reason
for
mortgage
payments
increasing
is
when
the
interest-only
period
ends.
This
was
a
common
issue
during
the
housing
crisis
in
the
early
2000s.

Typically,
an

interest-only
home
loan
becomes

fully
amortized
after
10
years.

In
other
words,
after
a
decade
you
won’t
be
able
to
make
just
the
interest-only
payment.

You
will
have
to
make
principal
and
interest
payments
to
ensure
the
loan
balance
is
actually
paid
down.

And
guess
what
–
the
fully
amortized
payment
will
be
significantly
higher
than
the
interest-only
payment,
especially
if
you
deferred
principal
payments
for
a
full
10
years.

Simply
put,
you
pay
the
entire
beginning
loan
balance
in
20
years
instead
of
30
since
nothing
was
paid
down
during
the
IO
period.

This
assumes
the

loan
term
was
for
30
years,
because
making
interest-only
payments
mean
the
original
loan
amount
remains
untouched.

It
can
result
in
a
big
monthly
mortgage
payment
increase,
forcing
many
borrowers
to
refinance
their
mortgages.

Just
hope
interest
rates
are
favorable
when
this
time
comes
or
you
could
be
in
for
a
rude
awakening.

Mortgage
Payments
Increase
When
Taxes
or
Insurance
Go
Up

• If
  your
  mortgage
  has
  an
  impound
  account
  your
  total
  housing
  payment
  could
  go
  up
• An
  impound
  account
  requires
  homeowners
  insurance
  and
  property
  taxes
  to
  be
  paid
  monthly
• If
  those
  costs
  rise
  from
  year
  to
  year
  your
  total
  payment
  due
  could
  also
  increase
• You’ll
  receive
  an
  escrow
  analysis
  annually
  letting
  you
  know
  if/when
  this
  may
  happen

Then
there’s
the
issue
of
property
taxes
and

homeowners
insurance,
assuming
you
have
an
impound
account.

Lately,
both
have
surged
thanks
to
rapidly
rising
property
values
and
inflation.

Even
if
you’ve
got
a

fixed-rate
mortgage,
your
mortgage
payment
can
increase
if
the
cost
of
property
taxes
and
insurance
rise,
and
they’re
included
in
your
monthly
housing
payment.

And
guess
what,
these
costs
do
tend
to
go
up
year
after
year,
just
like
everything
else.

A
mortgage
payment
is
often
expressed
using
the
acronym

PITI,
which
stands
for
principal,
interest,
taxes,
and
insurance.

With
a
fixed-rate
mortgage,
the
principal
and
interest
amounts
won’t
change
throughout
the
life
of
the
loan.
That’s
the
good
news.

However,
there
are
cases
when
both
the
homeowners
insurance
and
property
taxes
can
increase,
though
this
only
affects
your
mortgage
payments
if
they
are

escrowed
in
an
impound
account.

Keep
an
eye
out
for
an
annual
escrow
analysis
which
breaks
down
how
much
money
you’ve
got
in
your
account,
along
with
the
projected
cost
of
your
taxes
and
insurance
for
the
upcoming
year.

It
may
say
something
like
“escrow
account
has
a
shortage,”
and
as
such,
your
new
payment
will
be
X
to
cover
that
deficit.

Tip:
You
can
typically
elect
to
begin
making
the
higher
mortgage
payment
to
cover
the
shortfall,
or
pay
a
lump
sum
to
boost
your
escrow
account
reserves
so
your
monthly
payment
won’t
change.

Be
Prepared
for
a
Higher
Mortgage
Payment

The
takeaway
here
is
to

consider
all
housing
costs
before

determining
if
you
should
buy
a
home.
And
make
sure
you
know

how
much
you
can
afford
well
before
beginning
your
property
search.

You’d
be
surprised
at
how
the
costs
can
pile
up
once
you
factor
in
the
insurance,
taxes,
and
everyday
maintenance,
along
with
the
unexpected.

Fortunately,
annual
payment
fluctuations
related
to
escrows
will
probably
be
minor
relative
to
an
ARM’s
interest
rate
resetting
or
an
interest-only
period
ending.

It’s
typically
nominal
because
the
difference
is
spread
out
over
12
months
and
not
all
that
large
to
begin
with.

Though
recently
there
have
been
reports
of
big
increases
in
property
taxes
and
homeowners
insurance
premiums
thanks
to
surging
inflation.

So
it’s
still
key
to
be
prepared
and
budget
accordingly
as
your
housing
payments
will
likely
rise
over
time.

At
the
same
time,

mortgage
payments
have
the
ability
to
go
down
for
a
number
of
reasons
as
well,
so
it’s
not
all
bad
news.

And
remember,
thanks
to
our
friend
inflation,
your
monthly
mortgage
payment
might
seem
like
a
drop
in
the
bucket
a
decade
from
now,
while
renters
may
not
experience
such
payment
relief.

Read
more:

When
do
mortgage
payments
start?