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Fixed Mortgage Payments Aren’t Fixed

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There have been a lot of articles lately about the subprime lending industry (is anyone else not surprised these sort of shenanigans happened during the last housing boom?) and how a lot of homeowners who stretched to get into a home with an adjustable rate mortgage are now finding themselves being whalloped by higher payments. Personally, I can totally understand why people would get an ARM because while you don’t get “fixed” payments, you do get to move into a home now and you can always refinance. Herein lies the problem now, people are being screwed because their lender said they could always refinance after the 3 or 5 year mark, when the loan becomes adjustable, but they can’t because their credit isn’t good enough. While that is a problem, there’s also another one out there that isn’t get as much attention (because of the subprime lending story): those folks who stretched to get into a fixed rate mortgage but are seeing their monthly payments rise because of other factors – like real estate taxes!

When I purchased my home almost two years, the escrow on the mortgage was figured using the existing real estate taxes for the first year. In the second year, the escrow has a shortfall because the real estate taxes had increased because the value of the home increase from whatever it was to the purchase price. That, plus some other escrow items, increased the mortgage payment by a good 30%! Certainly that’s not like some of the other scary stories you hear about how mortgage payments doubled for some homeowners with ARMs, 30% is something that can destroy your finances if you don’t have any buffer built in.

So, for all you folks out there who think fixed means fixed forever, just remember that there are components in your mortgage that will always go up and so you have to be ready to weather those storms as well.

(Here I was thinking I had this awesome idea for a post and Mapgirl beat me by nearly a month!)

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17 Responses to “Fixed Mortgage Payments Aren’t Fixed”

  1. Red Dawg says:

    Great post. It would seem so many people don’t think about this before they purchase a home. They just max out what they can purchase and cross their fingers… bad plan!

    “…30% is something that can destroy your finances if you don’t have any buffer built in…”

    If you want to build net worth, you have to live on less than what you make (and have cash savings)… this includes your mortage payment potential. You may not “truly” be able to afford the house, even if you can afford the payment.

  2. Jethro says:

    I think part of responsible borrowing is not to push the envelope so far that an increase in escrow even creates a “storm”. I would pretty much ignore what you’re pre-qualified for when buying a home (even though I’d still do it for the seller’s sake), and decide based on your income, other debt, and budget how much home to buy–and still be able to pay taxes, insurance, and furniture.

  3. Dustin says:

    I think too many people do not think of the consequences of what will happy later in time when current economic conditions change to no longer be in their favor.

  4. Rich says:

    Mortgage lenders don’t talk about it, but there are many different formulas for calculating how much escrow they want you to keep. It’s all rigged to benefit the lenders. Personally I pay my own taxes without escrow. Why should I pay the lender to write a check 4 times a year? The town sends me a card and I pay my taxes right through the town’s website.

  5. JOSEPH says:

    What I find most amazing (and discusting) is how towns and cities across the country are always so quick to reassess when values are jumping but kinda forget about that point when real estate is in distress. They are equally to blame for a lot of these foreclosures. One would think that the banks would sit down and try to renegotiate these loans, creatively and fairly, in order to protect their clients and their shareholders.

  6. I also pay my own taxes. Thus putting down 20% to do it is worth it. But the average person moves every 5-7 years so Arms for that time frame are not necessarily a bad idea.

  7. thc says:

    Your impound account is not part of your mortgage. Your mortgage consists of interest and principal payments. Taxes and insurance are beyond the control of your lender. While important to be aware that these expenses can rise or fall , they are beyond the control of your mortgage lender.

    Rich: Computing escrow payments is highly regulated–there are not “different formulas”and it is not “rigged”.

  8. Shadox says:

    One of the advantages of living in California is that Prop 13 prevents property tax increases. That is one fewer things to worry about. Of course, if you live here you have to contend with the crazy real estate prices in the first place…

  9. I use the escrow service through my mortgage lender, but I budget seperately for my taxes than for the actual mortgage itself. Thus, it is rather a non-issue. I’ve only been in my house for one year, and my taxes have not gone up significantly, though.

  10. JimmyInGreatLakes says:

    Here in Michigan, our ppty taxes are capped at the rate of inflation as long as you stay in the house. The State Tax Commission pulled a cute trick last November as they declared the inflation rate 3.7% by extrapolating the first nine months CPI of 2006. Well, the last three months inflation numbers were benign and the actual CPI for ’06 was 2.5% so we are all paying 1.2% extra this year and beyond (it’s cumulative from year-to-year).

    Home insurance has certainly gone up this decade but seems to be leveling off so that’s getting tamed. I pay escrow but my lender (Washington Mutual) isn’t TOO egregious when it comes to withholding enough to pay the taxes/insurance. I know it’s not an ideal cash flow strategy, however, the convenience of a steady payment and letting them handle it is worth it to me.

    The home market is definitely hurting in our state and at least in my small town, the local assessors seem to be adjusting for that. I notice a lot of SEV’s are down this year although, most of the time, since there’s already a gap between SEV and taxable amounts (due to the ppty tax cap) the taxes aren’t lower for the majority of homeowners.

  11. Interesting article! This adjustment has happened to me on both my first home purchase and my second. So, this means I have to come up with the amount of the shortfall, plus the increased escrow amount for the new calculation. Thankfully, I am living well below my means and it isn’t a hardship to do so.

  12. Tinyhands says:

    I’m a no-escrow homeowner as well. I know two people whose escrow companies failed to properly adjust and wound up with shortfalls. One had to pay a huge lump sum + penalty and eventually had to sell her house.

    If given the choice, keep the money in YOUR account earning interest for YOU. Retain the flexibility to shop for your own insurance too.

  13. Joeactuary says:

    Rich: “Personally I pay my own taxes without escrow. Why should I pay the lender to write a check 4 times a year? The town sends me a card and I pay my taxes right through the town’s website.”

    Do you pay extra for this service? I don’t think there are any fees for this (at least not on my mortgage, but perhaps I should check?”

    I think the Tax escrow is pretty convenient. Like you, I get a bill 4x a year, but I just file it away as the mortgage takes care of it. My property taxes are pretty low (

  14. mapgirl says:

    I hate the way VA reassesses every year, but honestly, I think when prices fall, that I’ll probably have falling taxes too. Since I get property tax relief/refund, I’m just worried about how to reduce my income so I will continue to receive it. I shouldn’t complain too much about my rising payment since it only goes up $40 at most. I try to sock away extra escrow so the payment amount doesn’t change too much. I like to keep the monthly amoutn as fixed as possible. Too bad my mortgage lender doesn’t give interest on my escrow account like some do.

  15. RootAnn says:

    We have never escrowed insurance or property taxes. We get one bill per year for our taxes and can pay in two installments. While our taxes have gone up significantly, our mortgage payment is always the same. We find out the year before what next year’s taxes are and build it into our budget.
    We do this for the same reason we work to ‘break even’ (small payment or small refund) on our tax return each year – so our money works for us for the longest time. I’ve always gotten the feeling we are in the minority on not escrowing.

  16. Weekly Roundup – 03/16/07

    Here’s a quick look at some of the articles that caught my eye over the past week…

    JLP is remodeling his kitchen. See here for a followup.
    Flexo got busted for driving like a maniac.
    Jim has an interesting post about fixed mortgage paymen…

  17. ~Scott~ says:

    I don’t know about every state…but here in Florida, we have something called a “Homestead Exemption” that you can file for at your property tax assessors office that reduces your taxable property value by $25,000 and caps your property tax increase to 3% or the CPI (whichever is less). In the first year that I had this exemption on my home my property taxes actually went DOWN. Furthermore, no matter how fast they want to raise taxes in my county, MY tax burden cannot legally go up by any more than 3%.

    Now insurance…that’s a different story. Insurance rates are ridiculous.

    As for interest bearing escrow accounts…I don’t have one, but I can’t dump my escrow account because my VA home loan requires one. Ah well. Currently, I pay an additional amount to principle that is over $100. I think of this as both a way to pay off the house faster AND a buffer zone that (should mortgage payments increase dramatically from one year to the next) will allow me to simply stop paying extra and stay within my monthly budget.


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