When you sign the paperwork for a fixed-rate mortgage, you get a wonderful sense of security. You are told that your interest rate is locked in for the next 30 years and that your regular principal and interest payment will never change.
That part is absolutely true. Your actual loan payment stays exactly the same.
However, many first-time homebuyers are surprised a year or two down the road when they open their monthly mortgage statement and see that their total monthly bill has gone up by a few hundred dollars.
If the loan is fixed, how is that possible? The answer usually comes down to two things that keep growing over time: your property taxes and your homeowners insurance.
Understanding your escrow account.
When you buy a home, your monthly mortgage bill usually bundles a few different expenses together. You aren’t just paying back the money you borrowed. You are also paying your local property taxes and your home insurance premium.
To make life easier, most lenders set up an escrow account. Think of this as a dedicated savings account managed by your lender to cover taxes and insurance. Every month, a portion of your total payment goes into this account. When your annual tax bill and insurance bills are due, your lender automatically pays them out of that account for you.
This is a great tool because it means you do not have to worry about saving up thousands of dollars for one massive tax bill at the end of the year.
The annual escrow review.
Every year, your lender looks at your escrow account to make sure the math matches up. This is where the surprise happens.
As the value of your home increases over time, your local city or county will often increase your property taxes. At the same time, insurance companies frequently adjust their rates to cover rising construction costs.
If your property taxes go up by $600 for the year and your insurance premium goes up by $600 for the year, your escrow account is now $1,200 short. To cover that gap and make sure there is enough money for next year, your lender has to increase your monthly payment by $100 a month.
Even though your fixed-rate mortgage did not change, your overall housing costs did.
How to plan ahead for changes.
At Firefighters First Credit Union, we want to help you build a budget that keeps you protected from sudden financial surprises. While you cannot stop property taxes or insurance rates from shifting, you can plan ahead for them.
Here are a few smart habits to protect your budget:
- Review your insurance annually: Do not just let your policy auto-renew without looking at it. Chat with your insurance agent every year to see if you can get a better rate or find discounts.
- Expect a small shift every year: When you are calculating how much house you can afford, do not stretch your budget to the absolute maximum. Leave yourself a little bit of breathing room so a small increase in your monthly payment will not cause financial stress.
- Watch for your escrow statement: Your lender will send you an annual breakdown showing exactly where your money went. Reading this document carefully will help you see trends and adjust your household savings accordingly.
Your next step.
Understanding all the details of homeownership is a learning process, but you do not have to figure it out on your own. We are here to help you understand the full picture of your housing costs from day one.
Connect with a Firefighters First mortgage specialist today, and we can help you build a home-buying plan that fits your goals and your budget for the long haul.
