A while back, Zillow contacted me to see if they could write a guest article for Savvy Financial Latina. I thought it was perfect timing, just recently purchasing a home. I asked Tali to write an article about 4 ways mortgages can change throughout terms to inform and educate soon to be homeowners about their future expenses.
The process of searching for and purchasing homes can take several months for most buyers. House hunters calculate their budgets, search for homes within their price ranges, visit open houses and assess properties – all before making offers. The lengthy process is both exciting and often emotional since homes are typically long-term investments, dictating buyers’ communities and lifestyles for potentially the next 30 years.
Buying a home is one of the most expensive purchases in buyers’ lives. Therefore, they’re apt to pay close attention to each detail and all of the fine print during purchase agreements and loan acquisitions. They build close business relationships with their lenders, and learn to trust the guidance of their agents. After documents are signed and keys are transferred, the agreements are final – but changes still can occur.
Purchase terms remain the same, but unsuspecting mortgage changes occasionally cause new homeowners to feel concerned, confused or deceived. Here are four mortgage changes that may occur throughout fixed-rate loan terms.
1. New Loan Servicers
After weeks or months of working with lenders prior to purchasing homes, buyers tend to form trusting bonds with them. Shortly after sales are finalized, it’s common for lenders to sell loans to other lenders or investors. Rather than carrying loans, lenders sell them to free up capital to make new investments, or for profit. These deals do not reflect on the relationships between lenders and borrowers. In fact, loan originators often stay in touch with their clients to foster loyal relationships for future investments.
When a loan is sold by an originating lender to a servicing lender, the borrower’s loan terms remain the same. The original terms agreed upon at closing stay intact. The only noteworthy change for borrowers is the new addresses they send their monthly checks to. Some servicing lenders accept online payments, biweekly payments or multiple monthly checks; others do not. Simply clarify the new payment options and any associated fees.
2. Revised Monthly Payment Breakdowns
After loans are finalized, borrowers are committed to paying their monthly mortgage payments. Although the price remains the same each month, the first few years of payments primarily reduce borrowers’ interest balances and slowly pay off principal balances throughout the later years of loans. This ratio of principal and interest is known as a mortgage amortization schedule. Homeowners should not be surprised to have lofty principal balances after 10 full years of loan payments.
For instance, a 30-year, fixed-rate mortgage payment of $1,500 would breakdown to $1,050 of interest and $450 of principal on the first payment, level out in the 12th year and the final payment would consist of $5 of interest and $1,495 of principal. Even though monthly payment totals do not change, principal and interest breakdowns vary throughout loan terms.
3. Homeowner Insurance Premium Increases
In addition to principal and interest, monthly mortgage payments typically include one-twelfth of annual homeowners insurance and property tax fees. These partial payments accumulate in borrowers’ escrow accounts until they’re due in full. As with most bills, insurance companies often adjust their premiums for profit. Throughout 30-year terms, homeowners receive letters every few years detailing adjusted payments for increased homeowners insurance fees.
Proactive homeowners shop for insurance annually to find the best prices and avoid premium hikes. Some borrowers prefer higher deductibles to decrease monthly fees (emergency funds cushion steep deductibles), where others bundle homeowner and auto insurance with one provider for reduced prices. Other discounts are often available for highly-secure homes upon request. It is possible for insurance premiums to decrease in price, reducing borrowers’ mortgage payments, but increases are more common.
4. Property Tax Changes
Borrowers typically experience increased property taxes throughout ownership. Like insurance, annual taxes are portioned into monthly mortgage payments. In some areas of the country, property owners receive annual assessed value statements itemizing their property valuation details. In others, homeowners collect property cards at their city or county assessor’s office to determine valuation details such as property square footage, number of bedrooms and bathrooms, residential or commercial and other zoning information. Homeowners can file appeals on their property valuations.
Alternatively, homeowners can hire valuation professionals to assess their property values. However, appraisals aren’t free and outcomes may not reduce taxes – generous appraisals can raise property taxes. Before jumping into an appraisal, review local comparable sales to evaluate similar home values. If three or more comparable sales are significantly cheaper (8 percent or more), then the homeowner has substantiation for further research, an appraisal and/or an appeal.
Without fighting property tax increases, borrowers pay an additional lump sum to their lenders to correct deficits of annual taxes, with only slight mortgage increases moving forward. Otherwise, they might assume monthly mortgage payment spikes of a few hundred dollars for the remainder of the tax year to make up for the shortage in their tax escrow account.
These four scenarios demonstrate instances where a fixed-rate mortgage contract can change throughout the life of the loan. Keep in mind that adjusted-rate mortgages have changing interest rates throughout their terms, as agreed at closing. As long as homeowners are prepared for such circumstances, they’ll avoid internal panic, unexpected financial stressors and disappointment related to severed business relationships.