Wait! My mortgage went up! Why does your mortgage adjust annually and how can you prepare for potential changes?
Has this ever happened to you? You look at your bills and realize your mortgage payment has increased. Unfortunately, mortgage payments can fluctuate over time due to a variety of factors. In this blog, we’ll outline the reasons why your mortgage might adjust and how you can prepare for those changes.
Property tax changes
Local governments determine how much you pay in property taxes based on your home’s value. This process ensures homeowners pay the correct amount. Depending on where exactly you live, assessment timelines can vary.
An increase in your home’s value or the local property tax rate can lead to a higher tax bill. If your mortgage escrow account includes reserves for taxes, an increase in your assessed home value or tax rate may raise your monthly payment.
Escrow shortages
Escrow is a term used to describe the portion of your monthly payment applied toward property taxes and insurance.
Your financial institution uses money from the escrow account to pay the amount you owe when your tax or insurance bill is due. Sometimes, your lender or servicer may need to make up an escrow shortage. Therefore, your monthly payment may increase.
These shortages can occur if your insurance premiums or property taxes increase.
Interest changes
If you have an adjustable-rate mortgage, your interest rate can fluctuate. Once your initial fixed-rate period ends, the interest charged on an ARM adjusts according to market rates. However, these adjustments are usually capped based on your initial interest rate.
This is why most homebuyers gravitate toward fixed-rate mortgages. Having a FRM means your rate will not change. However, there are still reasons to apply for an ARM. Because ARMs change with market rates, they can decrease. If interest rates look like they might decline for a period of time, the monthly payment for your ARM may go down.
How can you prepare?
While there are many factors that can cause your mortgage rate to change, don’t fret! There are ways to prepare for these potential changes.
Gum Tree Mortgage provides useful tips that will keep you on top of your mortgage rates like:
Interest rate evaluation: Review your current interest rate compared to market rates.
Loan term assessment: Analyze if the length of your loan term is still ideal.
Home equity analysis: Assess the amount of equity you’ve built in your home.
Refinancing opportunities: Identify if refinancing could lower payments or shorten your loan term.
Financial goal alignment: Ensure your mortgage supports your current and future financial goals.
Although you can’t control whether or not your mortgage rates fluctuate, you can do your best to stay informed, prepare and adjust for those changes!