WHY DID MY MORTGAGE PAYMENT CHANGE?
Your Mortgage Payment CAN Change
You’re sitting at the closing table. You go over countless pages and documents detailing your loan (or mortgage) information. You receive a summary of that loan information in your closing disclosure (or settlement statement). It explains you will pay this much per month. You sign. You walk away, happy it’s over. The first year or so goes by, and BOOM! You’re hit with Payment Change Notice. Your payment has gone up! But WHY?
Typically the Notice of Payment Change will explain the change in your payment to you, but not always. Of course, you could call your Lender/ Loan Officer and get detailed information, and we encourage you to do so! However, we wanted to offer a primer on general reasons why your mortgage payment may increase (or in some cases, decrease).
TYPES OF MORTGAGES
The first reason you may see a change in your mortgage payment may occur because of the type of mortgage you have. While there are a myriad of types of mortgages you may be obligated to, we are taking the four most common into consideration here. A note is the contract for your loan, or mortgage specifically in this case. It explains, in great detail, all the terms of your loan, including the date of the contract, date of first payment, interest rate, initial principal and interest, duration, and maturity (or end) date. It essentially outlines how your loan is going to work - how it will be paid, how interest is calculated, and when it is considered late. It is very important you understand all of these terms at the time of closing, so be sure to ask your Lender and/ or Closing Attorney if something is unclear. Time should be taken during your closing to make sure you understand your loan and if you have questions, they should be answered before you sign anything.
1. Fixed Rate Note
A fixed rate note is a loan where the interest is fixed, i.e., it will not change for the duration of the loan. The monthly principal and interest payment you see on your closing disclosure will NOT change for the life of your loan, unless you modify or refinance to a new note or interest rate.
2. Adjustable Rate Note
An adjustable rate note means that your interest is flexible throughout the life of the loan. It can, and likely will, change multiple times throughout your loan. The interest rate can go up or down, and thus, while your monthly principal payment will likely remain the same, the interest rate will change, which will cause your monthly interest payment to change, and thus, your monthly principal and interest payment to change.
3. Construction Note
A construction note is a note where you will typically pay only interest for the first year of the life of your loan. After that first year, you will begin paying monthly principal and interest, and that payment is likely to be higher than your first year of payments. Construction notes can be either fixed or adjustable rate notes following that first year. Please see above to see how each of those may affect your monthly payment.
4. Balloon Note
A balloon note is a note in which you make a monthly principal and interest payment for a certain period of time. Then, at the maturity date, or your last payment on your schedule, whatever is left on the note is due and owing in full. By virtue of this type of note, your last payment is undoubtedly going to be much larger than any of your previous payments. Balloon notes are most typically adjustable rate notes, however, fixed rate balloons do exist. Please see above to see how each of those types of rates may affect your monthly payment.
RATE CHANGES
As discussed above, if you do not have a fixed rate note, you will experience rate increases (and sometimes decreases) in your interest rate. It adjusts in accordance with various market rates. The type of market rate for your loan is described in your closing documents. The frequency with which your rate can change is also set out in those documents. It is important you understand how often your rate can change. Is it annually? Every three years? Make sure you understand what to expect over the life of your loan.
ESCROW ACCOUNT
Regardless of the type of note you have, you may elect to have an escrow account with your loan. An Escrow Account is an account your lender holds to pay various fees or premiums associated with the ownership of your property. This is the primary reason ALL mortgages, regardless of type, see a change in their mortgage payment. There are two parts to your monthly mortgage payment: your principal and interest payment, which is determined by your type of mortgage and the rate you contracted for, and your escrow payment.
If you elected to have an escrow account as part of your mortgage payment, they would have collected a sum of money for some or all of these items on a prorated amount at closing. This amount is calculated based on the previous year’s bill, or if a previous year is not available, such as in new construction, based upon an estimate determined by a formula which was provided by the issuing agency.
After closing, part of your monthly payment, in addition to your monthly principal and interest payment, is paid into the escrow account. The funds are held on your behalf by your Lender to pay certain bills on your behalf. Your lender receives (or requests) the bill(s) and makes payments on your behalf to the entity requesting payment. Sometimes these amounts are higher than initially projected which would cause an increase in the amount you would need to fund into your escrow account the next year, which would increase your total monthly payment, though not necessarily affecting your principal and interest payment. Sometimes these amounts may also be lower than initially projected, in which case, you may have several options at the close of a fiscal year which could include reimbursement, lowering your total payment for the next year, or even applying the funds towards your loan balance. If there is a decrease in the overall funds needed to pay your property ownership fees or premiums, you will likely see a decrease in your total monthly payment as the funds needed for your escrow account will have decreased.
What do lender’s specifically pay out of an escrow account?
Private Mortgage Insurance
Homeowner’s Insurance Premiums
Homeowners or Property Owners Association Fees
County and City Taxes
You want to make sure you understand how your specific mortgage payment is being calculated and how your specific escrow account is going to work. We take the time in our closings to make sure you fully understand what is being paid, what is held and paid for from escrow, what can change, and why. We want to make sure you fully understand the ins and outs of such an important document. When it comes to your property - your legacy - experience matters. Call Your Hometown Attorney today at 706-359-3332 and let us educate and assist you with your real property!