The "Fixed Rate" = Fixed Payment Myth
One of the most confusing parts about your home loan mortgage payment is the idea that when you have a “fixed rate” that means that your mortgage payment is fixed and won’t change.
Have you done that online calculation of payment and decided that you like the payment and you are thinking that it won’t change for the life of the loan? You are among many, so let’s get educated!
When you sign up for a mortgage, there are multiple parts to your payment.
Here they are:
• Mortgage Insurance Premium-(this premium can NOT go up, but it can go down and can actually go away after you reach a certain loan to value in your home)
Hazard (or Homeowner’s) insurance
• Flood Insurance (required if property is located in a flood zone that requires you to carry flood insurance, optional if it is into)
• Condo or Homeowner’s association fees (these fees are NOT included in your monthly mortgage payment, but are included in the payment when you are applying for the loan so that the amounts can be calculated into your debt to income ratio)
So, for the purposes of this explanation let’s assume the following:
Purchase price of your home: $285,000
You want to make a Down payment of 10%
Loan Program: 30 year Conventional fixed rate mortgage
Interest Rate: 2.99%
Your debt to income ratio is 30/39 and your credit score is 699. So, your mortgage insurance is calculated at $131.26 a month
Annual Property taxes: $3,563
Annual Property Insurance: $2,250
Flood Zone of Property: AE
Annual Flood insurance: $1,882
Homeowner’s association requires dues: $290.00/ quarter
Here is what the breakdown would look like in your monthly payment.
1,080.00 Principal and Interest*
131.26 Mortgage Insurance Premium
187.50 Hazard (or Homeowner’s insurance)
156.83 Flood Insurance
24.17 Condo or Homeowner’s association fees
$1,876.67 would be your total monthly payment for QUALIFYING for the loan.
For the first year your MONTHLY MORTGAGE PAYMENT would be $1,852.50. And, you would make a quarterly payment of $290.00 to your homeowner’s association.
So, here is the FIXED/WILL NEVER INCREASE part of your loan:
$1,080 is the part of the payment that CAN NOT change for the life of the loan.
$131.26 (Mortgage Insurance Premium) will never increase, but it can decrease.
EVERYTHING else CAN and WILL CHANGE
Taxes can, and most likely will, change from year to year. Please check out our video and blog on how property taxes work!
Homeowner’s insurance and flood insurance can increase. We have seen premiums steadily climbing in Florida due to the hurricane activity that has affected our state over the last decade. Can your homeowner’s insurance decrease? Sometimes! Let’s say you decide to put a new roof on the house. Then it is time to call your agent and let them know and find out if it reduces your premium. It is always a good idea to shop for insurance every couple years. Just like car insurance, things change, and you may be able to get a better plan and rate elsewhere.
Condo and Homeowner’s association fees are voted on by the members. These fees can also fluctuate.
So, to recap for you- on a fixed interest rate loan the principal and interest portion of the loan are fixed for the life of the loan. The mortgage insurance premium will NOT increase for the life of the loan. All other portions of your payment can change.
*see how the amortization works to see how the principle and interest portions of the payment change over time