Fixed-rate Mortgages Don't Change, But Escrows Do

One of the biggest breaks homebuyers get with a fixed-rate mortgage is the escape from ever-escalating rents or adjustable rate increases. But that sigh of relief can be short-lived when you get your next property tax assessment or hazard insurance renewal.

When you buy a home with a fixed-rate mortgage, lenders require a year's worth of escrows in advance. These are included in your closing costs which can also be rolled into your loan, if you've got the wiggle room to borrow a little more money.

Hazard insurance is required by lenders to protect their investment. How much coverage you get is up to you, but you have to get at least enough to repay your liens. While it costs more, you should get your home insured for replacement value because that's the true cost of restoration.

A year's worth of insurance will be escrowed to the lender who services the loan, including paying your premiums. Once the first year goes by, the monthly cost of your premium is escrowed. From year to year, the cost of insurance can change drastically, due to natural disasters or changes in coverage. If there's been major flooding in your state, you insurance may decline to pay any claims related to water damage, even if the flooding was caused by an appliance. You'll have to get a rider, which costs extra.

Your monthly payments can also rise from increases in property taxes. You should expect this because the rate you pay your first year is based on what the previous owner paid. The seller pays the taxes due up to the day of closing, and you take over for the remainder of that year's assessment.

Your new assessment will be based on the market value of your home which you established when you purchased the home. Most city and county laws have formulas for how much your taxes can increase year-over-year. This prevents sticker shock. You'll also have plenty of advance warning as the taxing authorities will send you an assessment at least six months ahead of any annual change.

You can always challenge your tax assessments, but you'll need proof such as market comparables from your real estate professional. Taxing authorities use the same local multiple listing service as your agent, so expect them to have the same data you have.

A fixed rate mortgage can offer you some financial stability, but you'll be even more stable if you're prepared for monthly costs in the future.

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Kersh Ruhl

Kersh Ruhl

Realtor
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