Zweiacker & Associates

Why your fixed-rate note does not necessarily mean fixed-payment

helloquence-61189webDarn Taxes… Why your fixed-rate note does not necessarily mean fixed-payment.

You have just walked out of the title company after closing on your first home. It’s been an exciting process from viewing properties with your real estate agent, to working with your lender on a loan that is right for you, to the closing at the title company. As you walk out of the title company, excited to begin your move to your new life, you are thinking about all of the information that was just presented to you at the closing. If you are like most, the number that sticks with you is the monthly payment. ‘We can afford that! There may be some months where we have to tighten the proverbial belt, but we can do this! Thank goodness for fixed rate mortgages!’

Unfortunately, with all of the information presented to you at closing, one item that may have slipped by was how your escrow account operates. Your lender not only requires sufficient funds in escrow at any one time to be able to satisfy both property taxes and homeowner’s insurance, but they will also require a “cushion” of between two and three additional months.

Typically, for the first year or so of your loan, this is not an issue as the tax information should have been based on – worse case – the last taxing year information available. Unfortunately, one thing you can count on; taxes go up, not down.

calculator-385506_1920_webSo what happens when your property taxes go up, say, $2,000.00 next year? The unfortunate reality is that your lender probably will not be aware of it until they receive your tax bill to pay. When that happens, there may not be enough funds in your escrow account to cover the taxes causing an escrow deficit. Suppose your escrow was $1,200.00 short because of this increase of taxes. Your lender would need to increase your payment by $100.00 per month just to cover the short-fall. It’s not necessarily over with there though. Your lender – realizing that next year will probably call for an increase in taxes too – will want to account for that and will anticipate needing even more in your escrow account for the following year. This is called an escrow account review and is generally done around March of each year.

In our scenario above, let’s assume the lender determines that they will need an additional $60.00 per month to cover the assumed increase in taxes for the following year. Now, less than two years into your “fixed-rate” loan your payment has increased by $160.00.

A good real estate agent and especially a good lender will prepare you for these types of situations while shopping for your loan and planning what you can and can’t afford, but it is always a good idea to do your own research and be as prepared as possible for what the future brings.

As the old saying goes, “Nothing is certain except death and taxes”… Luckily only one happens every year!