How do mortgage payments go up if it’s a loan?
In: Economics
There are two things to keep in mind. Most mortgage payments include the payment for the mortgage, insurance and property taxes. If you have a fixed rate mortgage, that portion never changes but insurance and property taxes always go up so your payment will increase overall. If you have an adjustable rate mortgage your payments will fluctuate quite a lot. Never get adjustable rate mortgages. Outside the US you might only be able to get adjustable rate mortgages unfortunately.
Even people with a fixed rate loan are subject to mortgage payment increases, due to increases in property taxes and insurance. Most homeowners don’t pay those in lump sums, their bank takes escrow payments and stores them in a separate account to pay them when they are due. There’s usually the estimated property taxes, insurance premium, and then a contingency fund in case they get the insurance or tax estimates wrong. All of that is tied in with your loan repayments to make up the overall mortgage payment. If any of that goes up, so does your mortgage.
A lot of people (most?) pay their property tax and homeowner’s insurance premiums with their mortgage; the bank/mortgage company holds those amounts in escrow and pays your town and insurer when they come due. Both do these things pretty much only go up over time, so the lender periodically adjusts the amount of your monthly payment upward when they see there’s going to be an escrow shortfall.
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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