Fixed rate mortgages are attractive for one very common reason: stability. Whatever interest rate you signed in for when you got your mortgage, it will be the same throughout the life of the loan, be it for the whole 15 or 30 years.
This kind of security is appealing and makes many people think that’s all there is to it. But one of the most common misconceptions about fixed-rate mortgages is the belief that your payments will not, in any way, go up or down from the original amount.
Learning the nature of your monthly mortgage payment
Your monthly mortgage payment is more than just principal and interest. In general, it is comprised of four important elements: the principal, the interest, the taxes, and the insurance.
The principal is the money you borrow from the lender to pay for your home. Every month, you pay a portion of this principal, along with the interest. This interest is the money your lender charges for utilizing their money to pay for that house. The taxes is government money charged for your home, and the insurance is a kind of security you pay to the lender in the event that you default on the loan.
You may be curious as to why lenders are paying for your property tax and insurance when it’s supposed to be your job to fulfill those obligations. The logic is simple. Your home, which is under a mortgage, is also their property. And it’s always in every investor’s interest to protect their assets and investments. In this case, it’s your home.
To do this, they compound your mortgage payments with the property’s taxes and cost of insurance. They set this aside every month by utilizing a third party, escrow service. When the bills come, they pay for these fees on your behalf.
When prices go up
Annually, your lenders assess whether the money put into your escrow is enough to cover the cost of insurance and taxes or if there’s an excess. Based on this analysis, an adjustment will be made. This change might cause your mortgage payments to change. You may opt out of escrow and choose to pay these fees directly. In this case, your monthly mortgage payments would not change.
Knowing the technicalities of your loan could mean the difference between savings and financial trouble. Always talk to your lender to clarify any questions you might have about your mortgage payments.