When you get a mortgage or any other kind of loan, it’s common to think that you make a set payment every month. It just continues that way until 30 years down the line when you finally pay it off … right?
With a mortgage, your principal and interest payment may not change if you have a fixed-rate loan. If you have an adjustable rate mortgage (ARM), the rate changes periodically after a certain number of years.
However, there are other common reasons a mortgage payment can change. Let’s go over some of them here so that you’re not surprised when they come up. We’ll also let you know how to keep track of possible upcoming changes and plan for them.
Another change commonly affecting your mortgage payment is a change in your property taxes or homeowners insurance. Most people have these funds in an escrow account that’s included with their mortgage payment. Sometimes it’s even required by mortgage investors.
Escrow accounts can be very helpful because they allow you to split your tax and insurance bills into 12 equal monthly payments rather than paying for the whole lump sum every year. When your taxes and insurance, so does your escrow amount.
Local taxing authorities assess property values for tax purposes at different times. For this reason, mortgage servicers like Quicken Loans do an escrow analysis once a year.
Because your taxes or insurance costs won’t necessarily have gone up at the same time that your escrow is analyzed, you could end up with a shortage or overage in your escrow account.
If your property taxes or homeowners insurance costs go down, you’ll receive a check for the overage amount. Yay, free money! In actuality, you technically get your money back.
Dealing with a shortage is slightly different. First, you don’t have to worry about getting in trouble with your taxing authority or insurance company because your mortgage servicer will pay whatever tax amount is due.
When your escrow is analyzed, your monthly escrow payment will be adjusted for the new escrow amount. When it comes to dealing with a shortage, you have a couple of options for dealing with it:
- You can pay off the amount of the shortage in one lump sum.
- You can spread the shortage out over the next year by having a higher monthly escrow amount.
Just like your taxes, your homeowners insurance costs can also go up. You also may end up with an escrow shortage if you change homeowners insurance policies because your lender pays for the policy as soon as they get the new bill.
Fortunately, there’s a way you can avoid a huge shortage. When you cancel your policy, you’ll receive a prorated refund for the remaining time on the policy. You should send this into your mortgage servicer to be applied to your escrow account. Learn more about canceling homeowners insurance.
Quicken Loans clients can see important information regarding their escrow account using the escrow page within their Rocket Mortgage Servicing account. You’ll also be able to see the direction your escrow account has been trending.
Mortgage Insurance Removal
Once upon a time, the conventional wisdom was that you had to make a 20% down payment in order to get a home. That’s no longer the case as there are now a number of low down payment options. In exchange for a down payment option of low as 3%, you have to pay mortgage insurance.
If you reach a certain amount of equity or your mortgage insurance has been paid for a certain amount of time, eventually, you may not have to pay it anymore, leading to a lower monthly payment amount.
USDA loans have mortgage insurance that can’t be removed, but FHA and conventional loans have different guidelines.
Removing FHA MIP
If you have an FHA loan which closed on or after June 3, 2013, you can only remove mortgage insurance premiums (MIP) if you’ve made a down payment of 10% or more and paid mortgage insurance for at least 11 years. If your down payment is lower than that, it won’t be removed for the life of the loan.
If you received your loan closed before that date, the requirements work a little differently. MIP can generally be removed, when you reach 22% equity in your home; however, this is subject to certain timeframe restrictions. In any case, if you no longer pay for mortgage insurance premiums, your payment will decrease.
Here are more details about mortgage insurance removal.
If you wish to stop paying mortgage insurance premiums, but they can’t be removed, you can look into refinancing into a conventional loan where you wouldn’t pay mortgage insurance as long as you had 20% equity.
Removing Conventional PMI
If you pay for borrower-paid private mortgage insurance (PMI) on a monthly basis, it can be removed once you reach 20% equity in your home. It should be noted that in the majority of cases, this is going to require an appraisal in order to make sure that the property hasn’t lost value. This may be true for both conventional and FHA loans.
There are instances where more equity is required to cancel mortgage insurance on a conventional loan. The Rocket Mortgage Servicing page features more details on loan requirements.
Service Member Benefits
Those serving in our Armed Forces have enough to worry about keeping us safe every day. The government doesn’t want their mortgage causing them any more stress than they already deal with. That’s where the Service Members Civil Relief Act (SCRA) comes in.
SCRA covers service members from the date they enter an active duty cycle until one year following the end of an active duty assignment. During this time period, those on active duty are entitled to protections including:
- You are not forced to pay late fees.
- Your lender can’t foreclose on you.
- The interest rate on your mortgage during your active-duty service time is limited to 6%.
Unlike some other lenders, Quicken Loans automatically enrolls clients on active duty into the program for SCRA protection through a partnership with the federal government. If you’re going on the program during a duty cycle, your payment will decrease if your interest rate is above 6%. When coming off the program a year following your active service, your payment increases to your contractual interest rate if it’s above 6%.
If you set up auto pay through your Rocket Mortgage Servicing account, it will automatically adjust to whatever the new mortgage payment amount is including adding any additional payments toward principal that you were making before the change.
Learn more details about your rights under SCRA.
Another common way your mortgage payment can change is if you have an adjustable rate. It’s kind of in the name. But just how do adjustable rate mortgages (ARMs) work?
At Quicken Loans, all of our ARMs are based on 30-year terms. Then why do you see people talking about 5, 7 and 10-year ARMs?
All ARMs start with an initial teaser rate on the front of the loan. If you have a 7-year ARM, your payment is going to stay fixed at the initial rate for seven years.
You may see another number on ARMs that are being marketed, e.g. 7/1 ARM. The second number refers to how many times per year the rate adjusts at the end of the fixed period. Most commonly, this happens once per year.
When it’s time for your ARM to adjust, it goes up or down based on a couple of indexes depending on the investor in your mortgage. If you have a conventional loan through Fannie Mae or Freddie Mac, your interest rate is adjusted based on the 1-year London Interbank Offered Rate (LIBOR). If you have an FHA or VA mortgage, your interest rate adjustment is based on the 1-year Constant Maturity Treasury (CMT). This index number is then added to a margin to get your rate.
There’s no limit on how much your mortgage rate can go down due to market conditions, but there are limits to how much they can go up.
There are caps associated with your loan. For instance, you might see one labeled as “2/2/5.” This means there would be a limit of 2% increase on the initial adjustment at the end of the fixed period. After that, your rate could go up no more than 2% per year. Finally, your rate wouldn’t go up more than 5% for the entire lifetime of the loan.
If you still own the home and aren’t keen on your mortgage payment changing every year anymore, you can try to refinance into a fixed-rate mortgage before your payment changes.
You can check out your Rocket Mortgage Servicing account to keep up with any important information for your mortgage including payment changes. If you have any questions, you can leave us a comment below.