How do mortgage payments go up if it’s a loan?
In: Economics
Two reasons:
1. When you sign up for a mortgage, you can choose to go for a fixed rate or a adjustable rate loan. The Adjustable rate will fluctuate with the prime interest rate (when you hear that the Fed has “taken” or “given” a quarter). The fixed rate will remain the same for the life of the loan. The reasons to choose one or the other are too complicated for an ELI5, but just know that there are pros and cons to both kinds of loans, and they’re different for every buyer and every mortgage. The bottom line is that if you pick an adjustable rate loan, your payment will adjust when the rate adjusts.
2. There is often more to a mortgage payment than the principle and interest. Your mortgage company probably collects a little extra in your payments and holds them in an account for you called “escrow” so that they pay your property taxes, homeowners insurance, and potentially a couple of other things on your behalf. They make this sound like a “service” but it’s really just risk management on their side because they want to make sure that you’re paying for these things. And these things can fluctuate, which means your payment has to change with them. In fact, they will do an “escrow analysis” once per year to make sure that they’re collecting the right amount, and sometimes you can get a surprising bill when things to be “trued up”, depending on your particular loan and bank.
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