3 Factors that Affect a Fixed-Rate Mortgage
With a fixed-rate mortgage, the interest usually does not change over the duration of the loan. This can confuse many first-time homebuyers, because it makes it seem like the monthly payment for the loan will never change. However, certain factors can and do cause the monthly mortgage payment of a fixed-rate loan to change from one year to the next. Here's a look at some of the factors that can affect your monthly payment.
Factor One: Property Insurance
Home loan lenders usually require borrowers to maintain property insurance as long as the loan is outstanding. The exact insurance requirements can vary from one lender to the next; however, most will require you to have enough coverage to pay off any remaining debt on the mortgage in the event of a tragedy. After all, you're liable for the debt even if a fire or another disaster destroys your home. If you fail to secure your own homeowner insurance, the lender usually reserves the right to pick its own insurance provider.Most people pay for their property insurance through their mortgage lender. An insurance company will send the bill for the insurance premium to the lender every six months or annually, depending on the policy and the payment option you selected when you decided to work with the insurance company. If the insurance company changes the premium amount, your mortgage lender will adjust your monthly mortgage payment accordingly. For some individuals, this may lower the monthly payment. For others, it may increase the payment.
Factor Two: Property Taxes
Once a year, the lender will tap into the escrow account to pay your tax bill. If you have more than enough money in the account to cover your taxes, your lender may send you a refund check for the amount left over. When you don't have enough money in the escrow account to cover the taxes, the lender will usually pay the tax bill in full and then adjust your monthly payment to collect the difference. This typically increases your monthly payments.
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Factor Three: Mortgage Types
When you hear the term fixed-rate mortgage, you may think of the traditional 15-year mortgage or 30-year fixed-rate home loan. For both of these options, insurance and taxes are the most common reasons why the monthly payment might change. However, lenders now offer a variety of fixed-rate mortgages, including the following home loan types:- Convertible Mortgages: A convertible mortgage, often called a reduction option loan or a reducing interest loan, is a type of fixed-rate home loan that allows the borrower to pay a fee to change the interest rate. The contract between the lender and the buyer defines the conditions for this conversion, but the contract allows the borrower to adjust the loan to a lower interest rate at set intervals throughout the loan without having to refinance the loan. In convertible loans, the interest remains at a fixed rate even if the borrower converts the loan to a lower interest rate.
- Buydown Mortgages: Lenders offer a variety of buydown options from the common 2-1 buydown to other varieties. With this home loan option, the interest rate is a fixed rate, but it changes over the term of the loan. Most buy-down mortgages start with a lower interest rate and then adjust on an annual basis up to the final interest rate. Compressed buydowns adjust the interest rate every six months. For this type of home loan, you usually pay a fee to buy down the interest rate for a set time frame.
- Combination Loans: A combination mortgage can have a variety of names, including Two-Step, Super Seven or Premier Mortgage. Regardless of the name, the loan begins as a fixed-rate loan and then changes to an adjustable rate mortgage. The loan works well for an individual who plans to sell the home within five to seven years of purchasing it.