Did you know that your mortgage payments may fluctuate? Homeowners are often surprised when their monthly payments change, but it’s a relatively common occurrence due to changes in property taxes and insurance premiums.
When you finance the purchase of your home, the monthly mortgage payment includes the principal and interest for the loan as well as property taxes and homeowners insurance if you choose to, or have to, escrow those payments.
If those funds are held in escrow, it simply means the lender collects the money for taxes and insurances each month and holds them in an account until those bills come due each year. The lender then pays the bills on your behalf.
Typically, the only elements in the mortgage payments that will fluctuate are the property taxes and the insurance premiums.
Property taxes are the monies paid by property owners to their local and state governments to fund various services. The amount paid on a particular property is based on its assessed value. The higher the assessed value of the property, the higher the taxes will be.
Factors that can cause changes to property taxes can be anything that either increases or decreases the value of the property such as renovations and economic conditions. Those can change the value at any time, meaning the amount of property taxes due on the property can change at any time.
Lenders require home buyers to purchase homeowners insurance to cover damages to the property. Homeowners insurance premiums are based on risk factors and the amount of money the insurance company would have to pay out in the case of a claim.
Before closing on the loan, the lender will estimate the cost of insurance based on the zip code and comparable homes in the area. But once you are ready to close on the loan, you will have to shop around and find a policy that meets your needs. And, even after you have closed on the loan, you may want to regularly shop around to see if you can get better policies or better prices. Any changes to the policy will reflect in the premium which will, in turn, impact your monthly mortgage payment.
Because they can both have a significant impact on your mortgage and, therefore, your budget, it’s important to know and understand exactly what you will be paying in property taxes and insurance premiums before you close on a loan. This helps you better decide what you can really afford to pay each month. It’s also a reminder to build some flexibility into your budget for fluctuations in costs.